-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DLTF2Obq58b8MRJK8SQ9Knxe3fyOij2xWYtw6CfKZVFv1Gt7HS+0xV0qRwbLMebm 3FcO/L6WUQZvW34lWJBVhQ== 0001047469-99-010432.txt : 19990322 0001047469-99-010432.hdr.sgml : 19990322 ACCESSION NUMBER: 0001047469-99-010432 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 15 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990319 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INVESTMENT TECHNOLOGY GROUP INC CENTRAL INDEX KEY: 0000920424 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY BROKERS, DEALERS & FLOTATION COMPANIES [6211] IRS NUMBER: 133757717 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23644 FILM NUMBER: 99568410 BUSINESS ADDRESS: STREET 1: 380 MADISON AVE STREET 2: 2ND FLOOR CITY: NEW YORK STATE: NY ZIP: 10017 BUSINESS PHONE: 2125884000 MAIL ADDRESS: STREET 1: 11100 SANTA MONICA BLVD STREET 2: 12TH FLOOR CITY: LOS ANGELES STATE: CA ZIP: 90025 10-K 1 FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 COMMISSION FILE NUMBER 0--23644
------------------------ INVESTMENT TECHNOLOGY GROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-3757717 (State of incorporation) (IRS Employer Identification No.) 380 MADISON AVENUE, NEW YORK, NEW YORK (212) 588-4000 (Address of principal executive offices) (Registrant's telephone number, including area code) 10017 (Zip Code)
Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: ------------------------ COMMON STOCK, $0.01 PAR VALUE NASDAQ NATIONAL MARKET (Title of class) (Name of exchange on which registered) Aggregate market value of the voting stock held Number of shares outstanding of the Registrant's by non-affiliates of the Registrant at March Class of common stock at March 15, 1999: 15, 1999: $168,832,991 18,630,817
------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this form 10-K or any amendment to this form 10-K [ ] DOCUMENTS INCORPORATED BY REFERENCE: Proxy Statement relating to the 1999 Annual Meeting of Stockholders (incorporated, in part, in Form 10-K Part III). - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1998 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS
PAGE ----- PART I Item 1. Business............................................................................ 4 Item 2. Properties.......................................................................... 14 Item 3. Legal Proceedings................................................................... 14 Item 4. Submission of Matters to a Vote of Security Holders................................. 15 PART II Item 5. Market for Registrant's Common Stock and Related Stockholder Matters................ 16 Item 6. Selected Financial Data............................................................. 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................................................................... 19 Item 7A. Quantitative and Qualitative Disclosure about Market Risk........................... 27 Item 8. Financial Statements and Supplementary Data......................................... 28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......................................................................... 51 PART III Item 10. Directors and Executive Officers of the Registrant.................................. 51 Item 11. Executive Compensation.............................................................. 51 Item 12. Security Ownership of Certain Beneficial Owners and Management...................... 51 Item 13. Certain Relationships and Related Transactions...................................... 51 PART IV Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K................... 52
QUANTEX -REGISTERED TRADEMARK- ("QUANTEX") IS A REGISTERED TRADEMARK OF INVESTMENT TECHNOLOGY GROUP, INC. POSIT -REGISTERED TRADEMARK- ("POSIT") IS A REGISTERED SERVICE MARK OF THE POSIT JOINT VENTURE. SMARTSERVER IS A SERVICE MARK OF INVESTMENT TECHNOLOGY GROUP, INC. 2 FORWARD-LOOKING STATEMENTS In addition to the historical information contained throughout this Annual Report on Form 10-K, there are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All statements regarding our expected future financial position, results of operations, cash flows, dividends, financing plans, business strategies, competitive positions, plans and objectives of management for future operations, and concerning securities markets and economic trends are forward-looking statements. Although we believe our expectations reflected in such forward-looking statements are based on reasonable assumptions, there can be no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements herein include, among others, the actions of both current and potential new competitors, rapid changes in technology, fluctuations in market trading volumes, market volatility, changes in the regulatory environment, risk of errors or malfunctions in our systems or technology, cash flows into or redemptions from equity funds, effects of inflation, customer trading patterns, securities industry participants' responses to Year 2000 issues, as well as general economic and business conditions; securities, credit and financial and market conditions; adverse changes or volatility in interest rates. 3 PART I ITEM 1. BUSINESS. Investment Technology Group, Inc. ("ITGI" or the "Company") was formed as a Delaware corporation on March 10, 1994 and its principal subsidiaries include: (1) ITG Inc., a broker-dealer in securities registered under the Exchange Act, (2) Investment Technology Group International Limited, which is a 50% partner in the ITG Europe joint venture, and (3) ITG Australia Holdings Pty Limited, which is a 50% partner in ITG Pacific Holdings Pty Limited. We provide equity trading services and transaction research to institutional investors and brokers. We are a full service trade execution firm that uses technology to increase the effectiveness and lower the cost of trading. With an emphasis on ongoing research, we offer the following services: - POSIT: an electronic stock crossing system. - QuantEX: a decision-support, trade management and routing system. - SmartServers: offers server based implementation of trading strategies. - Electronic Trading Desk: an agency-only trading desk offering clients efficient trading services accessing multiple sources of liquidity. - ITG Platform: a PC-based routing and trade management system. - ISIS: a set of pre- and post-trade tools for systematically analyzing and lowering transaction costs. - ITG/Opt: a computer-based equity portfolio selection system. - Research: research, development, sales and consulting services to our clients. We generate revenues on a "per transaction" basis for all orders executed. Orders are delivered to us from our "front-end" software products, QuantEX and ITG Platform, as well as vendors' front-ends and directcomputer-to-computer links to customers. Orders may be executed on (1) POSIT, (2) the New York Stock Exchange, (3) certain regional exchanges, (4) market makers, (5) electronic communications networks and (6) alternative trading systems. POSIT POSIT was introduced in 1987 as a technology-based solution to the trade execution needs of quantitative and passive investment managers. It has since grown to serve the active trading and broker-dealer community. There are approximately 490 clients currently using POSIT, including corporate and government pension plans, insurance companies, bank trust departments, investment advisors and mutual funds. POSIT is an electronic stock crossing system through which clients enter buy and sell orders to trade single stocks and portfolios of equity securities among themselves in a confidential environment. Orders may be placed in the system directly via QuantEX and ITG Platform and computer-to-computer links or indirectly via the Electronic Trading Desk, which then enters the orders in the central computer. We also work in partnership with vendors of other popular trading systems, allowing users the flexibility to route orders directly to POSIT from trading products distributed by Bridge Information Systems, BRASS, Bloomberg and others. POSIT currently accepts orders for approximately 18,000 different equity securities, but may be modified, as the need arises, to include additional equity securities registered pursuant to Section 12 of the Exchange Act. An algorithm is run at scheduled times to find the maximum possible number of buy and sell orders that match or "cross." Typically, there is an imbalance between the number of shares 4 available to be bought or sold in the system. When this occurs, shares are allocated pro rata across participants, resulting in partial execution. POSIT has been designed to allow clients trade execution flexibility. Clients may specify constraints on the portion of a portfolio that trades, such as the requirement that net cash resulting from buys and sells remain within specified constraints. A client may also specify a minimum number of shares to be executed for a given order. POSIT prices trades at the midpoint of the best bid and offer on the primary market for each security at the time of the cross, based on information provided directly to the system by a third-party data vendor. There are seven scheduled crosses every business day: six regular crosses scheduled hourly, on the hour, between 10:00 a.m. and 3:00 p.m. (Eastern time) and an American Depositary Receipts cross at 8:45 a.m. (Eastern time). Each scheduled cross is normally executed within a five minute window selected randomly by the system. POSIT provides the following significant benefits to clients: - Confidential matching of buy and sell orders eliminates market impact. In contrast, participants in traditional or other open markets constantly face the risk that disclosure of an order will unfavorably affect price conditions. - Access to the substantial pool of liquidity represented by POSIT orders. - Clients pay a low transaction fee on completed transactions relative to the industry average of 5 to 6 cents per share. POSIT generates revenue from transaction fees charged on each share crossed through the system. - Immediately after each cross, the system electronically provides clients with reports of matched and unmatched (residual) orders. Clients can then execute residual orders by traditional means or take advantage of the Electronic Trading Desk services (described below). Since December 1997, we have offered POSIT 4. POSIT 4 gives POSIT users the option of customizing their trading objective and specifying additional constraints, while preserving the functionality of the existing POSIT system. This capability is referred to collectively as a POSIT 4 "strategy." This capability allows orders that might otherwise be ineligible for POSIT to participate in the match. POSIT 4 strategies include ResRisk, which allows users to control the risk of the unexecuted "residual" portfolio, and Pairs, which makes execution of one trade contingent on the execution of another, at or better than a given relative valuation. Portfolio funding, liquidation, restructuring and rebalancing are some of the types of transactions that are appropriate for execution using ResRisk. Risk arbitrage, statistical arbitrage and portfolio substitution trades are examples of transactions that can be implemented using the Pairs strategy. We also implement custom applications upon request. Total volume attributable to POSIT 4 in 1998 is 66 million shares. We have obtained a patent on the technology underlying POSIT 4. 5 The following graph illustrates the average daily volume of shares crossed on POSIT: AVERAGE DAILY POSIT SHARE VOLUME EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
SHARES PER DAY 1989 642,857 1990 1,703,557 1991 2,320,158 1992 4,330,709 1993 6,142,405 1994 7,737,742 1995 9,040,978 1996 13,067,553 1997 14,527,878 1998 23,151,105
QUANTEX QuantEX is our trade management system, an advanced tool for technologically sophisticated clients transacting large volumes of orders. QuantEX helps clients manage efficiently every step in the trading process: from decision-making to execution to tracking of trade list status. From a dedicated workstation at their desks, users can access fully-integrated real-time and historical data and analytics, execute electronic order routing and perform trade management functions. To date, trading systems have generally addressed just one or two of these functions--a situation that has left many users with the inefficiency of multiple unrelated systems. QuantEX is a rule-based decision support system that allows traders to quantify their trading processes. It is designed to implement each client's trading styles and strategies and to apply them to hundreds of stocks, portfolios or industry groups at once. With QuantEX, clients can flag precisely the same kinds of moment-to-moment opportunities they would ordinarily want to pursue, but do so much more efficiently and rapidly. QuantEX analyzes lists of securities based on the individual user's trading strategy. QuantEX enables clients to have access to our proprietary research, including pre-trade, post-trade and intra-day analytical tools. QuantEX has access to the ITG Data Center, which is a comprehensive historical database that provides a variety of derived analytics based upon raw historical data. Our support specialists translate the trading criteria developed by the client into a set of trading rules for trading securities, which are then loaded into QuantEX. QuantEX applies the client's proprietary trading rules to a continuous flow of current market information on the list of securities selected by the user to generate real-time decision support. A user's rules can be based on a wide range of quantitative models or strategies, such as liquidity measures, technical indicators, price benchmarks, tracking to specific industries and sectors, pairs or other long or short strategies, index arbitrage, risk measurements and liquidity parameters for trade urgency, size or timing. These rules typically serve as a guide in support of a client's trading decisions. Additionally, QuantEX supports the ability to implement these trading decisions automatically via an auto-trading strategy. 6 As such, QuantEX can automate the complex trade management requirements typical of investment strategies that trade large volumes of securities through multiple sources of liquidity. Orders can be electronically routed to multiple markets, including the New York, American and certain regional stock exchanges, the Nasdaq National Market, POSIT, the Electronic Trading Desk, over-the-counter market-makers, Bloomberg's Tradebook and selected broker-dealers. We intend to create links to additional electronic communications networks and other liquidity sources where appropriate. Trades routed through QuantEX are automatically tracked and summarized. Each order can be monitored by source of execution, by trade list, by portfolio or globally with all other orders placed. QuantEX's built-in trade allocation features provides a facility for automated back-office clearance and settlement. Our support specialists install the system, train users and provide ongoing support for the use of QuantEX's order routing and analysis capabilities. Specialists are knowledgeable about portfolio management and trading as well as the system's hardware and software. Our support team works closely with each client to develop trading strategies and rules, explore new trading approaches, provide system integration services and implement system upgrades and enhancements. Revenues are generated through commissions and transaction fees attached to each trade electronically routed through QuantEX to the many destinations available from the application. We do not derive royalties from the sale or licensing of the QuantEX software. SMARTSERVERS SmartServers allow clients to send orders to a computer for execution using a designated trading strategy. Clients may send orders via the Platform and QuantEX, via direct connections and via our Electronic Trading Desk. SmartServers implement a trading strategy in an automated fashion and thereby serve as an additional trading resource, allowing clients to focus their time and attention on other trading issues. We have introduced our first server-based trading strategy with the VWAP SmartServer. The VWAP SmartServer is designed to allow clients to direct their orders to us to be executed in a manner designed to closely track a security's volume-weighted average price, or VWAP, throughout the trading day. The VWAP SmartServer analyzes trade size and liquidity and determines the appropriate order size and order price to approximate the VWAP. Clients may choose to execute relative to the VWAP price for the entire trading day, or for some subset of that trading day. ELECTRONIC TRADING DESK The Electronic Trading Desk is a full-service agency execution group that specializes in the use of our proprietary products, including extensive use of POSIT for trade execution. For clients that do not send orders electronically to POSIT, our account executives receive orders for POSIT matches by telephone, fax or e-mail. The desk accepts orders until a POSIT match begins and after completion of the match execution reports are given verbally to clients who have placed verbal or fax orders with the desk. In addition to order management services for POSIT, the Electronic Trading Desk provides agency execution services. QuantEX and Platform clients deliver lists of orders electronically to our desk and, as orders are executed by the desk, reports are automatically delivered electronically to the client's terminal. Trading desk personnel are thereby able to assist customers with decision support analyses generated by ITG Platform or QuantEX and with the execution of trades. Clients give traders single stock orders or lists of orders to work throughout the day as well as unfilled orders that remain due to order imbalances in POSIT matches. 7 For order completion outside of POSIT match windows, the Electronic Trading Desk utilizes numerous sources of liquidity to complete the trade. The trading desk will actively seek the contra side of client orders by soliciting interest among other clients, use QuantEX to route the orders to multiple markets, including primary exchanges, regional exchanges, over-the-counter market makers and electronic communications networks, or use our active order traders to execute the trade with floor brokers or over-the-counter brokers. The Portfolio Trading Group of our desk focuses on agency-only list and program trading. By employing a step-by-step process that leverages technology and access to multiple sources of liquidity, the Portfolio Trading Group seeks to systematically achieve high quality execution for the client. A client program is evaluated with a pre-trade analysis to determine aggregate portfolio characteristics, liquidity ranking and market impact, and to quantify risk. The group implements a number of sophisticated trading strategies using QuantEX to meet execution objectives on an agency or agency incentive basis. After the execution is completed, we provide the client with comprehensive reports analyzing execution results utilizing ITG Research products. ITG PLATFORM ITG Platform, introduced in the first quarter of 1996, provides clients with seamless connectivity from their desktop to a variety of execution destinations, such as POSIT, the Electronic Trading Desk, our SmartServers, New York Stock Exchange and American Stock Exchange via SuperDOT, and the Nasdaq National Market and other over-the-counter market makers. We intend to create links to additional electronic communications networks and other liquidity sources where appropriate. Orders may be corrected or canceled electronically, and all reports are delivered electronically back to the ITG Platform. The ITG Platform also supports special trading interfaces as needed by POSIT 4 applications. Allocation information can be associated with executions in the ITG Platform and delivered to us electronically. ITG Platform has access to historical data through the ITG Data Center, including a wide array of analytics, such as average historical share volumes, dollar volumes, volatility and historical spread statistics. The ITG Platform was intended for broad distribution to institutional clients, so it was designed to run in conventional PC environments alongside other applications, and be inexpensive to install, maintain and support. Many technical features support these goals: - Other PC applications can interact with the ITG Platform using the Financial Information eXchange, or FIX, data messaging protocol or using "drag and drop." - ITG Platform incorporates a spreadsheet package, so users can extend their trade blotter with custom calculations. - Custom execution reports can be created to fit each user's requirements. - ITG Platform can access Bridge and ILX quote data if those systems are used by the client. - New versions of ITG Platform are distributed automatically to client sites and installed without user or our intervention. As of December 31, 1998, there were 507 installations of ITG Platform at 266 client sites. "ISIS" PRE- AND POST-TRADE ANALYSIS Accessed through QuantEX, ISIS is an equity pre- and post-trade analysis system. Via the ISIS facility, QuantEX users can request both aggregate and stock-by-stock liquidity reports for a trade portfolio prior to and during execution. Clients can generate standard reports or use a report writer to 8 design custom reports. Reports can be viewed, printed or saved to a file. Certain elements of these reports can also be displayed directly on the QuantEX execution page and referenced in QuantEX strategies. These pre-trade analyses help QuantEX users make decisions about how best to trade a portfolio, for example by helping identify the most difficult trades for special handling and by providing a reference point for evaluating principal trade pricing. The ISIS post-trade reporting facility allows QuantEX users to compare actual executed prices to user-selected benchmark prices in order to help assess trade execution quality. Available benchmarks include the volume-weighted average price, closing price and opening price. Post-trade reports generated by ISIS have the same output options as the pre-trade facility, namely on screen, to a printer or to a file. ITG/OPT ITG/Opt is a computer-based equity portfolio selection system that employs advanced optimization techniques to help investors construct portfolios that meet their investment objectives. Special features of the system make it particularly useful to "long/short" and taxable investors, as well as any investor seeking to control transaction costs. ITG/Opt is usually delivered as a "turnkey" system that includes software and, in some cases, hardware and data. Included in the service is telephone and on-site support to assist in training and integration of the system with the user's other investment systems and databases. In addition to its core portfolio construction capabilities, ITG/Opt has powerful backtesting and batch scheduling features that permit efficient researching of new or refined investment strategies. The system, which is targeted at highly sophisticated investment applications, is offered primarily on a value-added basis to our largest clients. Typically, portfolios that are constructed using ITG/Opt are executed via ITG, using one or more execution services, such as QuantEX, the Electronic Trading Desk and POSIT 4. ITG RESEARCH In addition to its role in the firm's overall research and development effort, Research provides both sales and consulting services to our clients and prospects. Taken together, these activities are a key component of our overall relationship development and maintenance activities. In its sales capacity, Research introduces our clients and prospects to the full range of products and services offered by the firm and provides information about features, pricing and technical/ functional specifications. The sales process includes development of an in-depth understanding of client practices and requirements and the design and presentation of integrated solutions based on our products. Consulting encompasses a set of value-added services for the benefit of our clients. These services break down into two main categories: support for our products and provision of quantitative analysis. The products supported by Research are QuantEX, ISIS, Platform, POSIT 4 and ITG/Opt. Support activities include trading strategy design and implementation, system integration, training and coordination of technical support. Quantitative analysis covers a broad range of activities such as transaction cost analysis, investment strategy simulations and provision of historical time series of proprietary analytics. As part of its analysis activities, Research publishes and distributes studies on topics of interest to its clients. In the same way users of fundamental research compensate the traditional brokerages that provide such research (i.e., directing commissions to such brokerage house), our clients reward the firm for these value-added research services. ITG EUROPE We are pursuing the international market in a variety of ways, through joint-ventures with strategic partners and the development of specially-tailored versions of our services. In the fourth quarter of 9 1998, we and Societe Generale finalized a 50/50 joint venture through the creation of Investment Technology Group (Europe) Limited. On November 18, 1998, ITG Europe launched a new agency brokerage operation that includes the operation of a European version of the POSIT system, which currently matches buyers and sellers of U.K.-listed equities twice daily, at 11:00 a.m. and 3:00 p.m., London time. AUSTRALIAN POSIT In 1997, we and Burdett, Buckeridge & Young finalized a 50/50 joint venture through the creation of ITG Australia Limited, a new international brokerage firm that applies our cost-saving execution and transaction research technologies to Australian equity trading. ITG Australia is the culmination of efforts commenced in 1995 when a license to POSIT was granted to Burdett, one of Australia's leading brokerage firms. Through this joint venture we are pursuing U.S. business from Australian investors and providing U.S. clients with access to the Australian marketplace. CANADIAN QUANTEX We have developed a version of QuantEX for the Canadian markets. This software is licensed on a perpetual, exclusive, royalty-free basis to VERSUS Technologies, Inc., a Canadian technology-focused trade automation firm based in Toronto. The period of exclusivity for the Canadian QuantEX license expires on December 31, 1999. Pursuant to this license and a series of transactions with RBC Dominion Securities, the predecessor owner of the VERSUS assets, we received a minority interest in VERSUS. We and VERSUS have also entered into three agreements for trade execution by us in POSIT and other United States markets: (a) a routing agreement pursuant to which VERSUS routes orders of Canadian registered brokers to us, (b) an introducing broker agreement pursuant to which VERSUS's registered broker affiliate sends institutional orders to us and (c) an introducing broker agreement pursuant to which VERSUS's registered broker affiliate sends retail orders to us. ARIZONA STOCK EXCHANGE We are the executing broker for all transactions executed on the Arizona Stock Exchange. We perform this function as a courtesy to our clients. We share revenues generated from these transactions with the Arizona Stock Exchange. REGULATION The securities industry in the United States is subject to extensive regulation under both federal and state laws. The SEC is the federal agency responsible for the administration of the federal securities laws. Regulation of broker-dealers has been primarily delegated to self-regulatory organizations, principally the National Association of Securities Dealers, Inc. and national securities exchanges. The National Association of Securities Dealers has been designated by the SEC as our self-regulatory organization. The self-regulatory organizations conduct periodic examinations of member broker-dealers in accordance with rules they have adopted and amended from time to time, subject to approval by the SEC. Securities firms are also subject to regulation by state securities administrators in those states in which they conduct business. ITG Inc. is a registered broker-dealer in 49 states and the District of Columbia. Broker-dealers are subject to regulations covering all aspects of the securities business, including sales methods, trade practices among broker-dealers, use and safekeeping of clients' funds and securities, capital structure of securities firms, record-keeping and conduct of directors, officers and employees. Additional legislation, changes in the interpretation or enforcement of existing laws and rules may directly affect the mode of operation and profitability of broker-dealers. The SEC, self-regulatory organizations and state securities commissions may conduct administrative proceedings, 10 which can result in censure, fine, the issuance of cease-and-desist orders or the suspension or expulsion of a broker-dealer, its officers or employees. The principal purpose of regulation and discipline of broker-dealers is the protection of clients and the securities markets, rather than the protection of creditors and stockholders of broker-dealers. ITG Inc. is required by law to belong to the Securities Investor Protection Corporation. In the event of a broker-dealer's insolvency, the Securities Investor Protection Corporation fund provides protection for client accounts up to $500,000 per customer, with a limitation of $100,000 on claims for cash balances. REGULATION ATS Since the formation of the POSIT joint venture, POSIT has operated under a no-action letter from the SEC staff that it would take no enforcement action if POSIT were operated without registering as an exchange. As a result, POSIT has not been registered with the SEC as an exchange, although ITG Inc. is registered as a broker-dealer and is subject to regulation as such. Material changes to POSIT currently require prior notice to the SEC pursuant to the conditions of the no-action letter and under Rule 17a-23 under the Exchange Act. On December 2, 1998, the SEC adopted Regulation ATS, which repeals Rule 17a-23 and establishes a new regulatory framework for alternative trading systems such as POSIT. Regulation ATS will allow alternative trading systems to choose to register as exchanges or as broker-dealers and will require compliance with informational requirements that are similar to Rule 17a-23. However, POSIT will no longer be subject to the restrictions of the no-action letter. Upon effectiveness of Regulation ATS on April 21, 1999, we anticipate that we will continue to operate POSIT as part of our broker-dealer operations and will not register POSIT as an exchange. There can be no assurance that the SEC will not in the future seek to impose more stringent regulatory requirements on the operation of alternative trading systems such as POSIT. In addition, certain of the securities exchanges have actively sought to have more stringent regulatory requirements imposed upon automated trade execution systems. There can be no assurance that Congress will not enact legislation applicable to alternative trading systems. NET CAPITAL REQUIREMENT As a registered broker-dealer, ITG Inc. is subject to the SEC's uniform net capital rule. The net capital rule is designed to measure the general integrity and liquidity of a broker-dealer and requires that at least a minimum part of its assets be kept in a relatively liquid form. The net capital rule prohibits a broker-dealer doing business with the public from allowing the aggregate amount of its indebtedness to exceed 15 times its adjusted net capital or, alternatively, its adjusted net capital to be less than 2% of its aggregate debit balances (primarily receivables from clients and broker-dealers) computed in accordance with the net capital rule. We use the latter method of calculation. A change in the net capital rule, imposition of new rules or any unusually large charge against capital could limit certain operations of ITG Inc., such as trading activities that require the use of significant amounts of capital. As of December 31, 1998, ITG Inc. had net capital of $72.0 million, which exceeded minimum net capital requirements by $71.7 million. Jefferies Group, Inc. ("Jefferies Group") and we have previously announced plans to separate Jefferies & Company, Inc. ("Jefferies & Company") and other Jefferies Group subsidiaries from our company through a spin-off and upstream merger and the related transactions. If the spin-off and upstream merger and the related transactions had been completed on December 31, 1998, on a pro forma basis ITG Inc. would have had regulatory net capital of $10 million, which includes pro forma borrowing of approximately $1.4 million. Based on a closing of the upstream merger of March 31, 1999, we estimate that ITG Inc. will have excess net regulatory 11 capital of approximately $20 million. In addition, we have arranged a $20 million revolving credit facility that we will be entitled to draw on to increase net regulatory capital. For a discussion of these transactions and the anticipated effects on operating and regulatory capital, see "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources and--Jefferies Group and ITGI Plan to Separate into Two Independent Companies". Although we believe that the combination of our existing net regulatory capital, operating cash flows and the revolving credit facility will be sufficient to meet regulatory capital requirements, a shortfall in net regulatory capital would have a material adverse effect on our business and our results of operations. CREDIT RISK Although ITG Inc. is registered as a broker-dealer, we generally do not perform traditional broker-dealer services. We do not act as a market-maker with respect to any securities or otherwise as a principal in any securities transactions; we act only on an agency basis. Therefore, we do not have exposure to credit risks in the way that traditional broker-dealers have such exposure. The relatively low credit risk of our businesses is reflected in the minimal net capital requirements imposed on ITG Inc. as a broker-dealer. LICENSE AND RELATIONSHIP WITH BARRA In 1987, Jefferies & Company and BARRA Inc. formed a joint venture for the purpose of developing and marketing POSIT. In 1993, Jefferies & Company assigned all of its rights relating to the joint venture and the license agreement, discussed below, to us. The technology used to operate POSIT is licensed to us pursuant to a perpetual license agreement between us and the joint venture. The license agreement grants us the exclusive right to use certain proprietary software necessary to the continued operation of POSIT and a non-exclusive license to use proprietary software that operates in conjunction with POSIT. We pay quarterly royalties to the joint venture to use other proprietary software that operates in conjunction with POSIT equal to specified percentages of the transaction fees charged by us on each share crossed through POSIT. For the years ended December 31, 1998, 1997 and 1996, BARRA received aggregate royalty payments from the joint venture of $15.2 million, $9.8 million, and $8.8 million, respectively, under the license agreement. Under the terms of the joint venture, we and BARRA are prohibited from competing directly or indirectly with POSIT. The license agreement permits BARRA on behalf of the joint venture to terminate the agreement upon certain events of bankruptcy or insolvency or upon an uncured breach by us of certain covenants, the performance of which are all within our control. Although we do not believe that we will experience difficulty in complying with our obligations under the license agreement, any termination of the license agreement resulting from an uncured default would have a material adverse effect on us. Under the license agreement and the terms of the joint venture, BARRA continues to provide certain support services to us in connection with the operation of POSIT, including computer time, software updates and the availability of experienced personnel. BARRA also provides support for the development and maintenance of POSIT. Under the terms of the joint venture, BARRA generally has the right to approve any sale, transfer, assignment or encumbrance of our interest in the joint venture. The POSIT joint venture may earn a royalty from licensing the POSIT technology to other businesses. The joint venture licensed to us and Burdett the right to use the POSIT technology for crossing equity securities in Australia. In the third quarter of 1997, BARRA finalized a joint venture with Prebon Yamane to market POSIT-FRA, the first computer-based system for crossing forward rate agreements. The POSIT joint 12 venture licensed the POSIT software to Prebon. POSIT-FRA provides a confidential electronic environment where major financial institutions can match specific sets of forward rate agreements contracts to offset interest rate risk, a condition that is pervasive in interest rate swap portfolios. In the fourth quarter of 1998, we finalized the formation of ITG Europe with Societe Generale. The POSIT joint venture has licensed to ITG Europe the POSIT software. COMPETITION The automated trade execution and analysis services offered by us compete with services offered by leading brokerage firms and transaction processing firms, and with providers of electronic trading and trade order management systems and financial information services. POSIT also competes with various national and regional securities exchanges and execution facilities, Nasdaq and electronic communications networks such as Instinet, for trade execution services. Many of our competitors have substantially greater financial, research and development and other resources. We believe that our services compete on the basis of access to liquidity, transaction costs, market impact cost, timeliness of execution and probability of trade completion. Although we believe that POSIT, QuantEX, ITG Platform and the Electronic Trading Desk and Research services have established certain competitive advantages, our ability to maintain these advantages will require continued investment in the development of our services, additional marketing activities and customer support services. There can be no assurance that we will have sufficient resources to continue to make this investment, that our competitors will not devote significantly more resources to competing services or that we will otherwise be successful in maintaining our current competitive advantages. In addition, we cannot predict the effect that changes in regulation may have on the competitive environment. In particular, the adoption of Regulation ATS may make it easier for securities exchanges, Nasdaq or others to establish competing trading systems. RESEARCH AND PRODUCT DEVELOPMENT We believe that fundamental changes in the securities industry have increased the demand for technology-based services. We devote a significant portion of our resources to the development and improvement of these services. Important aspects of our research and development effort include enhancements of existing software, the ongoing development of new software and services and investment in technology to enhance our efficiency. The software programs, which are incorporated into our services, are subject, in most cases, to copyright protection. Research and development costs were $11.0 million, $8.4 million and $6.8 million for 1998, 1997 and 1996, respectively. In connection with such research and product development and capital expenditures to improve other aspects of our business, we incur substantial expenses that do not vary directly, at least in the short term, with fluctuations in securities transaction volumes and revenues. In the event of a material reduction in revenues, we may not reduce such expenses quickly and, as a result, we could experience reduced profitability or losses. Conversely, sudden surges in transaction volumes can result in increased profit and profit margin. To ensure that we have the capacity to process projected increases in transaction volumes, we have historically made substantial capital and operating expenditures in advance of such projected increases, including during periods of low transaction volumes. In the event that such growth in transaction volumes does not occur, the expenses related to such investments could, as they have in the past, cause reduced profitability or losses. Additionally, during recent periods of high transaction volumes and increased revenues, we have also made substantial capital and operating expenditures to enhance future growth prospects. We work closely with BARRA on the development of POSIT enhancements. We expect to continue this level of investment to improve existing services and continue the development of new services. 13 DEPENDENCE ON PROPRIETARY INTELLECTUAL PROPERTY; RISKS OF INFRINGEMENT Our success is dependent, in part, upon our proprietary intellectual property. We generally rely upon patents, copyrights and trademarks to establish and protect our rights in our proprietary technology, methods and products. A third party may still try to challenge, invalidate or circumvent the protective mechanisms that we select. We cannot assure that any of the rights granted under any patent, copyright or trademark we may obtain will protect our competitive advantages. In addition, the laws of some foreign countries may not protect our proprietary rights to the same extent as the laws of the United States. There are numerous patents in the computer and financial industries and new patents are being issued at a rapid rate. Therefore, it is not economically practicable to determine in advance whether any of our products or any of its components or a service or method infringes the patent rights of others. It is likely that from time to time, we will receive notices from others of claims or potential claims of intellectual property infringement or we may be called upon to defend a joint venture partner, customer, vendee or licensee against such third party claims. Responding to these kinds of claims, regardless of merit, could consume valuable time, result in costly litigation or cause delays, all of which could have a material adverse effect on us. Responding to these claims could also require us to enter into royalty or licensing agreements with the third parties claiming infringement. Such royalty or licensing agreements, if available, may not be available on terms acceptable to us. EMPLOYEES As of December 31, 1998, we employed 261 personnel. ITEM 2. PROPERTIES Our principal offices are located at 380 Madison Avenue in New York City where we occupy the entire 4(th) floor or approximately 44,704 square feet of office space. In anticipation of future expansion we have leased a portion of the 5(th) floor (approximately 12,726 square feet of office space). This space is currently being sub-let. The lease payment as compared to the rental income will have an immaterial effect upon our operating results. The fifteen-year lease term for both the fourth and fifth floors expire in 2012. We also maintain a research, development and technical support services facility in Culver City, California where we occupy approximately 44,316 square feet of office space. We lease the California facility pursuant to a ten-year lease agreement that expires in December 2005. Additionally, we also maintain a "hot" backup and regional office for Financial Engineering Research and QuantEX support in Boston, Massachusetts where we occupy approximately 10,588 square feet of office space. The ten-year lease term for this space expires in 2005. ITEM 3. LEGAL PROCEEDINGS In 1998, we received a "30-day letter" proposing certain adjustments which, if sustained, would result in a tax deficiency of approximately $9.6 million plus interest. The adjustments proposed relate to (i) the disallowance of deductions taken in connection with the termination of certain compensation plans at the time of our initial public offering in 1994 and (ii) the disallowance of tax credits taken in connection with certain research and development expenditures. We believe that the tax benefits in question were taken properly and intend to vigorously contest the proposed adjustments. Based on the facts and circumstances known at this time, we are unable to predict when this matter will be resolved or the costs associated with its resolution. In February 1999, we became aware of patents purportedly owned by Belzberg Financial Markets & News International Inc. and Sydney Belzberg, an officer of that company (the "Belzberg 14 Patents"). One or more of the Belzberg Patents may relate to the devices, means an or methods that we and/or customers, licensees or joint venture partners use in the conduct of business. On March 5, 1999, a Canadian licensee of some of our technology, received a letter asserting that the licensee was infringing one of the Belzberg Patents. The licensee has denied the claims of infringement and has asserted that the Belzberg Patent at issue is invalid or unenforceable. Under certain conditions, we may have a duty to defend or indemnify the licensee for any costs or damages arising out of an infringing use of the technology we have licensed to them. We are monitoring the matter and may participate in any challenge to the Belzberg Patent the licensee may make. We are unaware of any actual claims of patent infringement leveled against us or any of our customers or joint venture partners by any of the title owners of the Belzberg Patents. Based upon our review to date we believe that any such claims arising out of the Belzberg Patents would be without merit and we would vigorously defend any such claim, including, if warranted, initiating legal proceedings. However, intellectual property disputes are subject to inherent uncertainties and there can be no assurance that any potential claim would be resolved favorable to us or that it would not have a material adverse affect on us. We will monitor the Belzberg Patent situation and take action accordingly. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders during the fourth quarter ended December 31, 1998. 15 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS COMMON STOCK DATA Our common stock is quoted on the Nasdaq National Market under the symbol "ITGI". In connection with the spin-off and upstream merger and the related transactions, we have applied for listing of New ITGI common stock on the New York Stock Exchange under the symbol "ITG." The following table sets forth, for the periods indicated, the range of the high and low closing sales prices per share of our common stock as reported on the Nasdaq National Market.
HIGH LOW --------- --------- 1998 First Quarter............................................................ $ 37.50 $ 24.38 Second Quarter........................................................... 35.50 25.50 Third Quarter............................................................ 34.00 27.25 Fourth Quarter........................................................... 62.06 18.50 1997 First Quarter............................................................ 23.75 18.38 Second Quarter........................................................... 26.88 17.88 Third Quarter............................................................ 32.00 26.31 Fourth Quarter........................................................... 31.25 26.25
On March 15, 1999, the closing sales price per share for our common stock as reported on the Nasdaq National Market was $46.50. On March 15, 1999, we believe that our common stock was held by approximately 1,500 stockholders of record or through nominee in street name accounts with brokers. We have not paid a dividend since May 4, 1994. Prior to and subject to the satisfaction of the conditions to the upstream merger, we will pay a special cash dividend of $4.00 per share to each stockholder of record as of April 20, 1999. Our revolving credit facillity restricts our ability to pay dividends. See "Management's Discussion of Financial Condition and Results of Operations--Liquidity and Capital Resources." Our dividend policy following consummation of the upstream merger will be to retain earnings to finance the operations and expansion of our businesses. Other than the special cash dividend, we do not anticipate paying any cash dividends on our common stock in the foreseeable future. 16 ITEM 6. SELECTED FINANCIAL DATA The selected Consolidated Statement of Operations data and the Consolidated Statement of Financial Condition data presented below as of and for each of the years in the five-year period ended December 31, 1998, are derived from our consolidated financial statements, which financial statements have been audited by KPMG LLP, independent auditors. Earnings per share information prior to 1997 has been retroactively restated to conform with the FASB SFAS No. 128, EARNINGS PER SHARE. Such data should be read in connection with the consolidated financial statements contained on pages 28 through 51.
YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1998 1997 1996 1995 1994(1) ---------- ---------- ---------- --------- ---------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) CONSOLIDATED STATEMENT OF OPERATIONS DATA: Total revenues................................................ $ 212,205 $ 137,042 $ 111,556 $ 72,381 $ 56,716 Total expenses................................................ 131,270 89,782 70,555 47,493 69,106 ---------- ---------- ---------- --------- ---------- Income (loss) before income taxes............................. 80,935 47,260 41,001 24,888 (12,390) Income tax expense (benefit).................................. 37,541 20,343 17,666 9,983 (4,529) ---------- ---------- ---------- --------- ---------- Net income (loss)............................................. $ 43,394 $ 26,917 $ 23,335 $ 14,905 $ (7,861) ---------- ---------- ---------- --------- ---------- ---------- ---------- ---------- --------- ---------- Basic net earnings (loss) per share of common stock........... $ 2.36 $ 1.48 $ 1.28 $ 0.81 $ (0.45) ---------- ---------- ---------- --------- ---------- ---------- ---------- ---------- --------- ---------- Diluted net earnings (loss) per share of common stock......... $ 2.25 $ 1.42 $ 1.26 $ 0.81 $ (0.45) ---------- ---------- ---------- --------- ---------- ---------- ---------- ---------- --------- ---------- Basic weighted average shares outstanding (in millions)....... 18.4 18.2 18.3 18.5 17.5 Diluted weighted average shares and common stock equivalents outstanding (in millions)................................... 19.3 18.9 18.6 18.5 17.5 CONSOLIDATED STATEMENT OF FINANCIAL CONDITION DATA: Total assets.................................................. $ 180,512 $ 113,641 $ 82,798 $ 55,318 $ 38,354 Total stockholders' equity.................................... $ 143,709 $ 93,763 $ 67,093 $ 45,479 $ 31,893 OTHER SELECTED FINANCIAL DATA: Revenues per trading day (in thousands)....................... $ 842 $ 542 $ 439 $ 287 $ 225 Shares executed per day (in millions)......................... 43 27 22 15 10 Revenues per average number of employees (in thousands)....... $ 888 $ 733 $ 814 $ 689 $ 675 Average number of employees................................... 239 187 137 105 84 Total number of customers(2).................................. 535 452 417 354 274 POSIT....................................................... 490 414 396 330 253 QuantEX..................................................... 54 50 55 81 58 Platform.................................................... 266 138 36 N/A N/A Total number of customer installations: QuantEX..................................................... 144 138 109 97 78 Platform.................................................... 507 204 67 N/A N/A Return on average stockholders' equity........................ 37.4% 33.9% 45.5% 39.3% (35.0)% Book value per share.......................................... $ 7.73 $ 5.15 $ 3.68 $ 2.47 $ 1.72 Tangible book value per share................................. $ 7.66 $ 5.04 $ 3.54 $ 2.27 $ 1.52 Price to earnings ratio using diluted net earnings per share of common stock............................................. 27.6 19.7 15.3 11.4 N/A
17 The following graph represents the number of shares ITG Inc. executed as a percentage of the market volume in the U.S. market.( 3) EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
ITG VOLUME AS A PERCENTAGE OF MARKET VOLUME 1993 0.0153 1994 0.017 1995 0.019 1996 0.0226 1997 0.0224 1998 0.0294
- ------------------------------ (1) In connection with our initial public offering (the "Offering") in May 1994, certain management employment agreements, the performance share plans (consisting of a 12.7% phantom equity interest in ITG Inc. and an annual profits bonus component) and non-compensatory ITG stock options (on 10% of the outstanding shares of ITG Inc. common stock) were terminated as of May 1, 1994 in exchange for $31.1 million in cash, a portion of which was used to purchase Jefferies Group common stock. Prior to December 31, 1993, we had expensed and paid to Jefferies Group an additional $9.4 million related to the above-mentioned Performance Share Plans. Immediately prior to the consummation of the Offering, Jefferies Group transferred its $9.4 million liability and an equivalent amount of cash to us and it was to be applied by the us as part of the termination of the Performance Share Plans. The total liability in connection with the above-mentioned plans was $40.5 million. Of the non-recurring expense of $31.1 million, approximately $900,000 was recorded in Performance Share Plans expense in the first two quarters of 1994 under the terms of the prior agreement. The total Performance Share Plans expense recorded for the first two quarters of 1994 was $1.5 million. The remaining $600,000 of such expense was for the annual profits bonus component of the Performance Share Plans for January 1, 1994 through May 1, 1994 (the termination date of the above-mentioned plans). Only the future annual profits bonus component (post Offering) of the above-mentioned plans was determined to be a component of the $40.5 million liability. The annual profits bonus component was earned during the period January 1, 1994 through May 1, 1994 by the payees regardless of the Offering. The remaining liability of $30.2 million was recorded as termination of plans expense in the second quarter of 1994. (2) Customers include those clients who have generated revenues in each year in excess of $1,000.00. (3) The percentages on the graph are total ITG shares executed divided by the "market" volume. Total ITG shares executed includes total POSIT shares, QuantEX shares and shares executed by the Electronic Trading Desk. Market volume includes shares executed by and as provided by the New York Stock Exchange and Nasdaq. Market volume excludes ITG shares executed. 18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion and analysis along with our financial statements, including the notes. GENERAL We are a leading provider of automated securities trade execution and analysis services to institutional equity investors. We are a full-service execution firm that utilizes transaction processing technology to increase the effectiveness and lower the cost of institutional and other trading. We generate substantially all of our revenues from a single line of business consisting of the following four services: - POSIT, an electronic stock crossing system; - QuantEX, a decision-support, trade management and routing system; - ITG Platform, a PC-based routing and trade management system; and - Electronic Trading Desk, an agency-only trading desk offering clients efficient trading services with multiple sources of liquidity. REVENUES primarily consist of commissions and fees from customers' use of our transaction processing and analysis services. Because these commissions and fees are paid on a per-transaction basis, revenues fluctuate from period to period depending on the volume of securities traded through our services. EXPENSES consist of compensation and employee benefits, transaction processing, software royalties, occupancy and equipment, consulting, telecommunications and data processing services, net loss on long-term investments, spin-off costs and other general and administrative expenses. Compensation and employee benefits expenses include base salaries, bonuses, employment agency fees, part-time employee compensation, commissions paid to employees of Jefferies Group, fringe benefits, including employer contributions for medical insurance, life insurance, retirement plans and payroll taxes, reduced by the employee portion of capitalized software. Transaction processing expenses consist of floor brokerage and clearing fees. Software royalties expenses are payments to our POSIT joint venture partner, BARRA. Occupancy and equipment expenses include rent, depreciation, amortization of leasehold improvements, maintenance, utilities, occupancy taxes and property insurance. Consulting expenses are fees and commissions paid to non-employee consultants for equity research, product development and other activities. Telecommunications and data processing services include costs for computer hardware, office automation and workstations, data center equipment, market data services and voice, data, telex and network communications. Net loss on long-term investments includes gains on the sale of equity investments, as offset by amortization of goodwill, equity loss pickup and initial start-up costs. Spin-off costs include legal, accounting, consulting and various other expenses related to the Company's proposed spin-off and upstream merger and the related transactions. Other general and administrative expenses include amortization of goodwill, legal, audit, tax and promotional expenses. 19 RESULTS OF OPERATIONS The table below sets forth certain items in the statement of income expressed as a percentage of revenues for the periods indicated:
YEAR ENDED DECEMBER 31, ------------------------------- 1998 1997 1996 --------- --------- --------- Revenues................................................................................. 100.0% 100.0% 100.0% Expenses................................................................................. Compensation and employee benefits..................................................... 24.3 22.2 22.5 Transaction processing................................................................. 12.7 15.6 14.1 Software royalties..................................................................... 7.2 7.2 7.9 Occupancy and equipment................................................................ 5.6 6.7 5.5 Consulting............................................................................. 1.1 1.5 2.2 Telecommunications and data processing services........................................ 3.8 4.8 4.3 Net loss on long-term investments...................................................... 0.1 0.2 0.0 Spin-off costs......................................................................... 0.9 0.0 0.0 Other general and administrative....................................................... 6.2 7.3 6.8 Total expenses................................................................... 61.9 65.5 63.2 Operating income......................................................................... 38.1 34.5 36.8 Income tax expense....................................................................... 17.7 14.8 15.8 Net income............................................................................... 20.4 19.6 20.9
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 REVENUES Total revenues increased $75.2 million, or 54.9%, from $137.0 million to $212.2 million. The number of trading days were 252 in 1998 compared to 253 in 1997. Revenues per trading day increased by $300,000, or 55.5%, from $542,000 to $842,000. Revenues per employee increased $182,000, or 28.8%, from $631,000 to $813,000. The increases were attributable to increases in the number of our customers and increases in trading volume by our existing customers. Revenues from the Electronic Trading Desk increased $19.5 million, or 64.9%, from $30.1 million to $49.6 million. Number of shares crossed on the POSIT system increased 2.1 billion, or 56.8%, from 3.7 billion to 5.8 billion. POSIT revenues in turn increased $41.6 million, or 55.2%, from $75.4 million to $117.0 million. QuantEX revenues increased $12.0 million, or 39.9%, from $30.1 million to $42.1 million. EXPENSES Total expenses increased $41.5 million, or 46.2%, from $89.8 million to $131.3 million. 20 The following table itemizes expenses by category (in thousands):
YEAR ENDED DECEMBER 31, -------------------- 1998 1997 CHANGE % CHANGE --------- --------- --------- ----------- Compensation and employee benefits................................... $ 51,462 $ 30,479 $ 20,983 68.8% Transaction processing............................................... 26,920 21,413 5,507 25.7 Software royalties................................................... 15,247 9,848 5,399 54.8 Occupancy and equipment.............................................. 11,886 9,204 2,682 29.1 Consulting........................................................... 2,338 2,017 321 15.9 Telecommunications and data processing services...................... 8,138 6,605 1,533 23.2 Net loss on long-term investments.................................... 204 297 (93) (31.3) Spin-off costs....................................................... 1,936 -- 1,936 N/A Other general and administrative..................................... 13,139 9,919 3,220 32.5 Income taxes......................................................... 37,541 20,343 17,198 84.5
COMPENSATION AND EMPLOYEE BENEFITS. Salaries, bonuses and related employee benefits increased approximately $21.0 million over the prior year. Such increases were primarily due to our profitability-based compensation plan, growth in our employee base of 44 or 20.3%, from 217 to 261 and additional compensation necessary to attract and retain quality personnel. Over 50% of the increase in new employees were staffed in technology, product development and production infrastructure. In addition, our board of directors voted to accelerate the vesting of the options of our recently deceased President and Chief Executive Officer, Scott P. Mason, resulting in a $2.8 million charge to compensation expense, representing 13% of the increase. TRANSACTION PROCESSING. The increase in transaction processing is primarily due to an increase in ticket charges associated with a higher volume of transactions in 1998. The increase in ticket charges of 28% was not proportionate with the increase in revenues of 55% due to volume discounts associated with clearing and execution services. A decrease in specialist fees of 26% and floor broker fees of 3%, was offset by the volume increases in shares executed by specialists of 49% and floor brokers of 51%, resulting in a net increase in transaction processing expenses. Transaction processing as a percentage of revenues decreased from 15.6% in 1997 to 12.7% in 1998. SOFTWARE ROYALTIES. As software royalties are contractually fixed at 13% of POSIT revenues, the increase is wholly attributable to an increase in POSIT revenues. OCCUPANCY AND EQUIPMENT. The increase in occupancy and equipment is primarily attributable to additional depreciation and amortization of leasehold improvements (representing 65% of the increase) and rent expense (representing 33% of the increase) related to the relocation and expansion of our corporate headquarters (occupied in June 1997), combined with increases in headcount and purchases of additional technologically advanced software. CONSULTING. The increase in consulting expense is primarily due to costs incurred for accounting and financial research of international joint venture opportunities and a major telecommunication system conversion. TELECOMMUNICATIONS AND DATA PROCESSING SERVICES. The increase in technological and data communications processing expenses stems primarily from the data feed upgrades for clients, primarily market data line connections, and expenses relating to a telecommunication network conversion and contingency planning. NET LOSS ON LONG-TERM INVESTMENTS. The decrease in net loss on long-term investments is due to income of $3.8 million recognized from the sale of our 37.4% equity ownership interest in the Long- 21 View Group, Inc., offset by initial start-up costs for ITG Europe of $1.3 million and the combined costs of equity loss pick-up and amortization of goodwill on ITG Australia of $0.2 million and the LongView Group, Inc, of $0.8 million. SPIN-OFF COSTS. The spin-off expenses are attributable to our legal, accounting, consulting and other expenses incurred for the spin-off transactions. OTHER GENERAL AND ADMINISTRATIVE. The increase in other general and administrative expenses was the result of a write-off of a net receivable from the former Global POSIT joint venture of approximately $1.0 million, accelerated software amortization for specific products, increases in business development costs, such as advertising and active sales efforts, and additional administrative costs, associated with ITG Europe. INCOME TAX EXPENSE The increase in income tax expense is the result of an increase in pretax income and an increase in the effective tax rate from 43.0% in 1997 to 46.4% in 1998. The increase in the effective rate was due to certain non-deductible expenses, such as goodwill amortization and spin-off costs and the inability to offset international losses with United States profits in calculating income tax expense, that were not present in 1997. YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 REVENUES Total revenues increased $25.4, or 22.9%, from $111.6 million to $137.0 million. Increased revenues were attributed to a growing use of POSIT, QuantEX and Electronic Trading Desk services. POSIT revenues increased $8.2 million, or 12.2%, from $67.2 million to $75.4 million while QuantEX revenues increased $5.2 million, or 21.2%, from $24.9 million to $30.1 million. Electronic Trading Desk services increased $12.3 million, or 69.2%, from $17.8 million to $30.1 million. Revenues per trading day increased by $103,000, or 23.5%, from $439,000 to $542,000. Revenues per employee decreased $80,000, or 11.3%, from $711,000 to $631,000. EXPENSES Total expenses increased $19.2 million, or 27.3%, from $70.6 million to $89.8 million. The following table itemizes expenses by category (in thousands):
YEAR ENDED DECEMBER 31, -------------------- 1997 1996 CHANGE % CHANGE --------- --------- --------- ----------- Compensation and employee benefits..................................... $ 30,479 $ 25,047 $ 5,432 21.7% Transaction processing................................................. 21,413 15,737 5,676 36.1 Software royalties..................................................... 9,848 8,798 1,050 11.9 Occupancy and equipment................................................ 9,204 6,111 3,093 50.6 Consulting............................................................. 2,017 2,492 (475) (19.1) Telecommunications and data processing services........................ 6,605 4,789 1,816 37.9 Net loss on long-term investments...................................... 297 -- 297 N/A Spin-off costs......................................................... -- -- -- N/A Other general and administrative....................................... 9,919 7,581 2,338 30.8 Income taxes........................................................... 20,343 17,666 2,677 15.2
COMPENSATION AND EMPLOYEE BENEFITS. The increase in compensation and employee benefits expenses is due to an increase in the number of employees offset by an increase in capitalized software. 22 Capitalized software development costs increased approximately $4.4 million, primarily due to additional projects and an increase in staff engaged in software development. Compensation and employee benefits expenses per person decreased $18,000, or 11.3%, from $159,000 to $141,000. TRANSACTION PROCESSING. The increase in transactions processing expenses is primarily due to the expense associated with a higher volume of transactions and shares. Transaction processing expenses as a percentage of revenues increased from 14.1% to 15.6%, primarily from a shift in the business mix towards QuantEX and Electronic Trading Desk services. Those products have slightly lower margins than POSIT due to charges for floor brokerage fees which are not incurred with the POSIT business. SOFTWARE ROYALTIES. As software royalties are contractually fixed at 13% of POSIT revenues, the increase is wholly attributable to an increase in POSIT revenues. OCCUPANCY AND EQUIPMENT. The increase in occupancy and equipment expense is due primarily to relocation of our corporate headquarters from 900 Third Avenue to 380 Madison Avenue in mid-June 1997. Rent expense increased accordingly as the rental square footage increased by more than 100%. We also had to accelerate the write-off of the unamortized leasehold improvements from the 900 Third Avenue location. In addition, depreciation expense increased approximately $1.7 million as a result of purchases of additional equipment associated with both the move and increased headcount. CONSULTING. Consulting is primarily for functions, which we currently believe, are advantageous to out-source. The decrease is due primarily to our undertaking in 1996 nonrecurring special projects related to contingency planning and systems' security. TELECOMMUNICATIONS AND DATA PROCESSING SERVICE. The increase is due primarily to communications costs incurred in 1995 and 1996 relating to the POSIT Joint Venture, which were presented for payment in the second quarter of 1997. In addition, duplicate services were required for the 900 Third Avenue and 380 Madison Avenue locations in connection with the move of our headquarters. NET LOSS ON LONG-TERM INVESTMENTS. The increase in the net loss on long-term investments is due to the combined costs of equity loss pick-up and amortization of goodwill on ITG Australia and the LongView Group, Inc, of $79,000 and $218,000, respectfully. OTHER GENERAL AND ADMINISTRATIVE EXPENSE. The increase is largely attributable to the increase in headcount of 60 employees. Related costs, primarily services provided by Jefferies & Company, increased by approximately $374,000. Travel and entertainment costs increased by approximately $1.1 million primarily from an increased effort to promote our products. Legal fees increased by approximately $510,000 as a result of exploring several strategic initiatives and the costs associated with outsourcing legal services pending the hiring of a new in-house general counsel. INCOME TAX EXPENSE Income tax expense increased by $2.6 million, or 14.7% from $17,700 to $20,300. The increase is primarily due to an increase in pretax income. The effective tax rate in 1997 and 1996 was 43.0% and 43.1%, respectively. DEPENDENCE ON MAJOR CUSTOMERS During 1998, revenue from our 10 largest customers accounted for approximately 30.7% of our total revenue while revenue from each of our three largest customers accounted for 7.9%, 4.5% and 3.2%, respectively, of total revenue. During 1997, revenue from our 10 largest customers accounted for approximately 34.5% of our total revenue while revenue from each of our three largest customers accounted for 8.8%, 5.9%, and 3.4%, respectively, of total revenue. Customers may discontinue use of our services at any time. The loss of any significant customers could have a material adverse effect on 23 our results of operations. In addition, the loss of significant POSIT customers could result in lower share volumes of securities offered through POSIT, which may adversely affect the liquidity of the system. LIQUIDITY AND CAPITAL RESOURCES Our liquidity and capital resource requirements are the result of the funding of working capital needs, primarily consisting of compensation, benefits and transaction processing fees and software royalty fees. Historically, all working capital requirements have been met by cash from operations. A substantial portion of our assets is liquid, consisting of cash and cash equivalents or assets readily convertible into cash. We believe that our cash flow from operations and existing cash balances will be sufficient to meet our cash requirements. We generally invest our excess cash in money market funds and other short-term investments that generally mature within 90 days or less. Additionally, securities owned, at fair value, include highly liquid, variable rate municipal securities, auction rate preferred stock and common stock. At December 31, 1998, cash equivalents amounted to $77.3 million and receivables from brokers, dealers and other of $24.1 million were due within 30 days. We also invest a portion of our excess cash balances in cash enhanced strategies, which we believe should yield higher returns without any significant effect on risk. As of December 31, 1998, we had an investment in an arbitrage fund. The fund's strategy is to invest in a hedged portfolio of convertible securities. This strategy seeks an enhanced level of capital appreciation by focusing on current income and capital appreciation. At December 31, 1998, the amount of these investments was $1.0 million. Historically, all regulatory capital needs of ITG Inc. have been provided by cash from operations. See "Business--Regulation." We believe that cash flows from operations and the payment of the exercise price upon the exercise of expiring options will provide ITG Inc. with sufficient regulatory capital. On March 16, 1999, we entered into an agreement with a bank to borrow, effective upon the closing of the merger, up to $20 million on a revolving basis to enable ITG Inc. to satisfy its regulatory net capital requirements. The commitment will expire on March 14, 2000. Any amounts drawn may be prepaid at any time, but no later than March 15, 2001. We have agreed to pay an up-front fee totaling 1.5% of the commitment and will incur a fee at a rate per annum equal to 0.35% on the daily amount of the unused commitment to March 13, 2000. The interest rate on any amounts drawn will be prime; if such amounts are not repaid within two weeks, the interest rate will increase to prime plus 2%. The credit facility is secured by a pledge of the stock of ITG Inc., ITG Ventures, Inc. and ITG Global Trading Incorporated. This agreement limits our ability to pay cash dividends or incur indebtedness and requires us to comply with certain financial covenants. Assuming that the merger and related transactions will close on March 31, 1999, following payment of the special cash dividend we estimate that ITG Inc. will have excess net regulatory capital of approximately $20 million (not including the $20 million available under the new revolving credit facility). Although we believe that the combination of our existing net regulatory capital, operating cash flows and the revolving credit facility will be sufficient to meet regulatory capital requirements, a shortfall in net regulatory capital would have a material adverse effect on us. In 1998, we established a $2 million credit line with a bank to fund temporary regulatory capital shortfalls encountered periodically by ITG Australia. The lender charges us interest at the federal funds rate plus 1%. We lend amounts borrowed to the ITG Australia and charge interest at the federal funds rate plus 2%. At December 31, 1998, no amounts were outstanding under this bank credit line and no amounts were owed to us by the ITG Australia. Borrowings from the bank and loans to the ITG Australia will not be permitted during the period that the revolving credit agreement discussed above is effective. 24 EFFECTS OF INFLATION We do not believe that the relatively moderate levels of inflation which have been experienced in North America in recent years have had a significant effect on our revenue or profitability. However, high inflation may lead to higher interest rates which might cause investment funds to move from equity securities to debt securities or cash equivalents. THE YEAR 2000 ISSUE Some computer systems and software products were originally designed to accept only two digit entries in the data code field. As a result, certain computer systems and software packages will not be able to interpret dates beyond December 31, 1999 and thus will interpret dates beginning January 1, 2000 incorrectly. This could potentially result in computer failure or miscalculations, causing operating disruptions, including an inability to process transactions, send invoices or engage in normal business operations. Therefore, companies may have to upgrade or replace computer and software systems in order to comply with the "Year 2000" requirements. STRATEGY We are well aware of and are actively addressing the Year 2000 issue and the potential problems that can arise in any computer and software system. Planning and evaluation work began in 1997 including the identification of those systems affected. We established a "Year 2000 working group" to address the Year 2000 issue. We have targeted our efforts into three major areas: (1) vendors; (2) company proprietary products; and (3) clients. VENDORS. Our ability to successfully meet the Year 2000 challenge is in part dependent on our vendors. We have contacted our vendors to determine the status of their Year 2000 programs and have created a database recording each vendor's readiness status. Over 95% of our vendors have responded that their systems are currently Year 2000 compliant, and substantially all of our vendors have indicated that they expect their systems to be Year 2000 compliant by September 30, 1999. Based upon the results of our testing to date, we are satisfied with the representations we have received from our vendors. We are in the process of integrating Year 2000 compliant versions of our vendors' software and hardware with our proprietary products. COMPANY PROPRIETARY PRODUCTS. We have evaluated our trading systems and have endeavored to examine all code contained in our internally produced software. We have completed regression testing of all mission critical systems and released Year 2000 compliant versions of all such systems other than QuantEX. We plan to complete date-forward testing of all mission critical systems and release a Year 2000 compliant version of QuantEX by the end of June 1999. We also intend to participate in the Securities Industry Association's industry-wide testing program in 1999. CLIENTS. We sent a letter explaining our Year 2000 strategy to all clients in July 1998. In addition, we contacted clients on a project-by-project basis to ascertain compatibility between our systems and changes made to the clients' systems. We plan to provide point-to-point testing opportunities for our clients starting in April 1999. YEAR 2000 CONTINGENCY PLANNING We are in the early stages of establishing a Year 2000 contingency plan to deal with both internal and external failures of critical systems. The Year 2000 issue can affect all businesses that rely heavily on automated systems. Our Year 2000 contingency plan is therefore intended to address failures of internal systems, client connections and connections to trading destinations, as well as failures of major infrastructure components. We intend to have our contingency plan in place by July 1999 and to update and refine such plan as needed on a continuing basis. We believe, however, that such contingency plan 25 will not provide satisfactory solutions for our worst-case scenario--the general failure of computer and communication systems relied upon by the securities industry, such as the systems provided by long distance telephone companies, the stock exchanges, Nasdaq, The Depository Trust Company and ADP Brokerage Services, and the failure of Jefferies & Company and W&D to provide services under their clearing and execution agreement with us. Such failure would prevent us from operating in whole or in part until such systems or services have been restored and could have a material adverse effect on us. In the event any of our internally developed systems fails, we will undertake to remediate such system on an emergency basis at the time of such failure. To ensure that adequate staff will be available to handle any such emergencies in January of 2000, we have imposed a moratorium on employee vacations during the first two weeks of January 2000, and have made arrangements to have a number of software development personnel (normally based in our Culver City office) at our New York headquarters during the final week of December 1999 and the first week of January 2000. Our inability to remediate a failure of any of our internally developed mission critical systems would prevent us from operating in whole or in part until such systems have been restored and could have a material adverse effect on us. COSTS We do not believe that the costs incurred to ready our systems for the Year 2000 will have a material effect on our financial condition. Total costs for the whole project are estimated to be between $2.5 and $3.0 million, which includes the cost of personnel, consultants and software and hardware costs. Through December 31, 1998, we had spent approximately $1.5 million on the Year 2000 project. RECENT ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION". SFAS 131 requires that public business enterprises report certain information about operating segments in complete sets of financial statements of the enterprise and in condensed financial statements of interim periods issued to shareholders. It also requires that these enterprises report certain information about their products and services, the geographical areas in which they operate, and their major customers. SFAS 131 is effective for fiscal years beginning after December 15, 1997, although earlier application was permitted. The disclosure requirements of this standard were not applicable since the Company manages its operations through a single line of business (institutional agency trade executions). In March 1998, the Accounting Standards Executive Committee issued Statement of Position 98-1 "ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE". SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use. It identifies the characteristics of internal-use software and provides examples to assist in determining when the computer software is for internal use. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998, although earlier application is encouraged, and should be applied to internal-use computer software costs incurred in those fiscal years for all projects, including those in progress upon initial application of this SOP. We do not anticipate that the implementation of this statement will have a material impact on our consolidated financial statements. JEFFERIES GROUP AND ITGI PLAN TO SEPARATE INTO TWO INDEPENDENT COMPANIES On March 17, 1998, we announced that we were planning the separation of Jefferies & Company and other Jefferies Group subsidiaries from our company through a series of transactions, including a special cash dividend, the transfer of Jefferies Group's assets and liabilities (other than those related to our company), a spin-off and a merger. Upon the consummation of the spin-off and upstream merger 26 and the related transactions, the stockholders of Jefferies Group will be stockholders of our company and Jefferies Group will cease to be our parent company. First, the Company will pay a special cash dividend of $4.00 per share, payable pro rata to all of our stockholders of record on April 20, 1999, including Jefferies Group. The aggregate amount of the special cash dividend will be up to $75 million, of which we will pay $60.0 million to Jefferies Group. Following the payment of the special cash dividend, Jefferies Group will transfer all of its assets (other than its approximately 80.5% equity interest in our company) and all of its liabilities (other than liabilities related to our company) to a new company ("New Jefferies"). After such transfers have been completed and certain other conditions have been satisfied, Jefferies Group will distribute all of the outstanding common stock of New Jefferies pro rata to Jefferies Group stockholders. The spin-off will be followed immediately by a tax-free merger of our company into Jefferies Group, with our public shareholders receiving shares of Jefferies Group. Jefferies Group will then be renamed Investment Technology Group, Inc. ("New ITGI"). Based on the number of shares of Jefferies Group common stock expected to be outstanding on the date of the spin-off and upstream merger (approximately 23,900,000) and the number of shares of our common stock held by Jefferies Group (15,000,000), our public stockholders other than Jefferies Group will receive approximately 1.59 shares of common stock of New ITGI for each share of our common stock held by them. The spin-off and upstream merger and the related transactions are contingent on a number of factors, including receipt of all board of directors and shareholder approvals of Jefferies Group and our company and other required regulatory and contractual approvals. The spin-off and upstream merger and the related transactions are expected to close in April 1999. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK None. 27 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA FINANCIAL REPORTS SECTION
PAGES ----- Management's Responsibility for Compliance and Financial Reporting............................... 29 Independent Auditors' Report..................................................................... 30 Consolidated Statements of Income................................................................ 31 Consolidated Statements of Financial Condition................................................... 32 Consolidated Statements of Changes in Stockholders' Equity....................................... 33 Consolidated Statements of Cash Flows............................................................ 34 Notes to Consolidated Financial Statements....................................................... 35
28 MANAGEMENT'S RESPONSIBILITY FOR COMPLIANCE AND FINANCIAL REPORTING TO THE SHAREHOLDERS: The management of Investment Technology Group, Inc. is responsible for the integrity and objectivity of the financial information presented in this Annual Report. Financial information appearing throughout the Annual Report is consistent with that in the accompanying financial statements. The financial statements have been prepared by management of our company in conformity with generally accepted accounting principles in the United States. The financial statements reflect, where applicable, management's best judgments and estimates. The management of our company has established and maintains an internal control structure and monitors that structure for compliance with established policies and procedures. The objectives of an internal control structure are to provide reasonable, but not absolute, assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition, and that transactions are executed in accordance with management's authorization. Management also recognizes its responsibility to foster and maintain a strong ethical environment within our company to ensure that its business affairs are conducted with integrity and in accordance with high standards of personal and corporate conduct. This responsibility is characterized and reflected in our company's Statement of Policy on Standards of Employee Conduct, which is distributed to all of our employees. As part of the monitoring system, we maintain Corporate Compliance Personnel, who have oversight responsibilities for administering and coordinating the application of these standards of conduct. Senior legal and compliance personnel have been directed to report compliance concerns directly to the President of our company. Ongoing oversight of compliance activities is the responsibility of our President. Our board of directors appoints an audit committee composed solely of outside directors. The function of the audit committee is to oversee the accounting, reporting, audit and internal control policies and procedures established by our management. The committee meets regularly with management and the internal and independent auditors. The auditors have free access to the audit committee without the presence of management. The audit committee reports regularly to our board of directors on its activities, and such other matters as it deems necessary. Our company's annual consolidated financial statements have been audited by KPMG LLP, independent auditors, who were appointed by the board of directors. Management has made available to KPMG LLP all of our company's financial records and related data, as well as the minutes of directors' meetings. Furthermore, management believes that all its representations to KPMG LLP are valid and appropriate. In addition, KPMG LLP, in determining the nature and extent of their auditing procedures, considered our company's accounting procedures and policies and the effectiveness of the related internal control structure. Management believes that, as of December 31, 1998, our company's internal control structure was adequate to accomplish the objectives discussed herein. Raymond L. Killian, Jr. John R. MacDonald Angelo Bulone Chairman, Chief Executive Officer Senior Vice President Vice President and President and Chief Financial Officer and Controller
29 INDEPENDENT AUDITORS' REPORT The Board of Directors Investment Technology Group, Inc.: We have audited the accompanying consolidated statements of financial condition of Investment Technology Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Investment Technology Group, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP New York, New York January 20, 1999 30 INVESTMENT TECHNOLOGY GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31, ---------------------------------- 1998 1997 1996 ---------- ---------- ---------- REVENUES: Commissions................................................................ $ 205,163 $ 133,700 $ 108,821 Interest and dividends..................................................... 3,635 2,650 1,751 Other...................................................................... 3,407 692 984 ---------- ---------- ---------- Total revenues........................................................... 212,205 137,042 111,556 EXPENSES: Compensation and employee benefits......................................... 51,462 30,479 25,047 Transaction processing..................................................... 26,920 21,413 15,737 Software royalties......................................................... 15,247 9,848 8,798 Occupancy and equipment.................................................... 11,886 9,204 6,111 Consulting................................................................. 2,338 2,017 2,492 Telecommunications and data processing services............................ 8,138 6,605 4,789 Net loss on long-term investments.......................................... 204 297 -- Spin-off costs............................................................. 1,936 -- -- Other general and administrative........................................... 13,139 9,919 7,581 ---------- ---------- ---------- Total expenses........................................................... 131,270 89,782 70,555 Income before income tax expense............................................. 80,935 47,260 41,001 Income tax expense........................................................... 37,541 20,343 17,666 ---------- ---------- ---------- NET INCOME................................................................... $ 43,394 $ 26,917 $ 23,335 ---------- ---------- ---------- ---------- ---------- ---------- Basic net earnings per share of common stock................................. $ 2.36 $ 1.48 $ 1.28 ---------- ---------- ---------- ---------- ---------- ---------- Diluted net earnings per share of common stock............................... $ 2.25 $ 1.42 $ 1.26 ---------- ---------- ---------- ---------- ---------- ---------- Basic weighted average shares outstanding.................................... 18,365 18,178 18,284 ---------- ---------- ---------- ---------- ---------- ---------- Diluted weighted average shares and common stock equivalents outstanding.................................................... 19,289 18,940 18,586 ---------- ---------- ---------- ---------- ---------- ----------
The accompanying Notes to Consolidated Financial Statements are integral parts of this statement. 31 INVESTMENT TECHNOLOGY GROUP, INC. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31, ---------------------- 1998 1997 ---------- ---------- ASSETS Cash and cash equivalents................................................................. $ 77,324 $ 14,263 Securities owned, at fair value........................................................... 39,615 37,358 Receivables from brokers, dealers and other, net.......................................... 24,127 10,131 Due from affiliates....................................................................... 722 1,365 Investments............................................................................... 1,000 10,935 Premises and equipment.................................................................... 19,662 19,506 Capitalized software...................................................................... 6,450 5,973 Goodwill.................................................................................. 1,373 1,922 Deferred taxes............................................................................ 2,784 2,460 Other assets.............................................................................. 7,455 9,728 ---------- ---------- Total assets.............................................................................. $ 180,512 $ 113,641 ---------- ---------- ---------- ---------- LIABILITIES AND STOCKHOLDERS' EQUITY Accounts payable and accrued expenses..................................................... $ 24,154 $ 12,664 Payable to brokers, dealers and other..................................................... 1,881 61 Software royalties payable................................................................ 4,070 2,663 Securities sold, not yet purchased, at fair value......................................... 288 3 Due to affiliates......................................................................... 2,557 2,999 Income taxes payable to affiliate......................................................... 3,853 1,488 ---------- ---------- Total liabilities..................................................................... 36,803 19,878 ---------- ---------- Lease commitments (note 14) Contingencies (note 17) STOCKHOLDERS' EQUITY: Preferred stock, par value $0.01; shares authorized: 5,000,000; shares issued: none.......................................................... -- -- Common stock, par value $0.01; shares authorized: 30,000,000; shares issued: 19,405,361 in 1998 and 18,818,468 in 1997.................... 194 188 Additional paid-in capital................................................................ 51,511 38,554 Retained earnings......................................................................... 104,925 61,531 Common stock held in treasury, at cost; shares: 815,000 in 1998 and 597,500 in 1997..................................................... (12,760) (6,510) Accumulated other comprehensive loss: Currency translation adjustment......................................................... (161) -- ---------- ---------- Total stockholders' equity............................................................ 143,709 93,763 ---------- ---------- Total liabilities and stockholders' equity................................................ $ 180,512 $ 113,641 ---------- ---------- ---------- ----------
The accompanying Notes to Consolidated Financial Statements are integral parts of this statement. 32 INVESTMENT TECHNOLOGY GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON ADDITIONAL STOCK ACCUMULATED PREFERRED COMMON PAID-IN RETAINED HELD IN COMPREHENSIVE STOCK STOCK CAPITAL EARNINGS TREASURY LOSS ----------- ----------- ----------- ----------- ----------- ----------------- Balance at December 31, 1995.......... $ -- $ 187 $ 36,055 $ 11,279 $ (2,042) $ -- Net income............................ -- -- -- 23,335 -- -- Purchase of common stock for treasury (135,000 shares).................... -- -- -- -- (1,721) -- ----------- ----- ----------- ----------- ----------- ----- Balance at December 31, 1996.......... -- 187 36,055 34,614 (3,763) -- Net income............................ -- -- -- 26,917 -- -- Issuance of restricted stock (24,219 shares)............................. -- -- 630 -- -- -- Issuance of common stock in connection with the employee stock option plan (92,249 shares)..................... -- 1 1,869 -- -- -- Purchase of common stock for treasury (152,300 shares).................... -- -- -- -- (2,747) -- ----------- ----- ----------- ----------- ----------- ----- Balance at December 31, 1997.......... -- 188 38,554 61,531 (6,510) -- Issuance of common stock in connection with the employee stock option plan (574,978 shares).................... -- 6 12,652 -- -- -- Issuance of common stock in connection with the employee stock purchase plan (11,915 shares)................ -- -- 305 -- -- -- Purchase of common stock for treasury (217,500 shares).................... -- -- -- -- (6,250) -- Comprehensive income/(loss): Net income.......................... -- -- -- 43,394 -- -- Other comprehensive loss, net of tax ($0.00): Currency translation adjustment... -- -- -- -- -- (161) Comprehensive income.................. ----------- ----- ----------- ----------- ----------- ----- Balance at December 31, 1998.......... $ -- $ 194 $ 51,511 $ 104,925 $ (12,760) $ (161) ----------- ----- ----------- ----------- ----------- ----- ----------- ----- ----------- ----------- ----------- ----- TOTAL STOCKHOLDERS' EQUITY ------------- Balance at December 31, 1995.......... $ 45,479 Net income............................ 23,335 Purchase of common stock for treasury (135,000 shares).................... (1,721) ------------- Balance at December 31, 1996.......... 67,093 Net income............................ 26,917 Issuance of restricted stock (24,219 shares)............................. 630 Issuance of common stock in connection with the employee stock option plan (92,249 shares)..................... 1,870 Purchase of common stock for treasury (152,300 shares).................... (2,747) ------------- Balance at December 31, 1997.......... 93,763 Issuance of common stock in connection with the employee stock option plan (574,978 shares).................... 12,658 Issuance of common stock in connection with the employee stock purchase plan (11,915 shares)................ 305 Purchase of common stock for treasury (217,500 shares).................... (6,250) Comprehensive income/(loss): Net income.......................... 43,394 Other comprehensive loss, net of tax ($0.00): Currency translation adjustment... (161) ------------- Comprehensive income.................. 43,233 ------------- Balance at December 31, 1998.......... $ 143,709 ------------- -------------
The accompanying Notes to Consolidated Financial Statements are integral parts of this statement. 33 INVESTMENT TECHNOLOGY GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31, --------------------------------- 1998 1997 1996 ---------- ---------- --------- Cash flows from operating activities: Net income..................................................................... $ 43,394 $ 26,917 $ 23,335 Adjustments to reconcile net income to net cash provided by operating activities: Deferred income tax benefit.................................................. (324) (103) (2,027) Depreciation and amortization................................................ 11,599 6,642 3,957 Undistributed loss (income) of affiliates.................................... 3,535 441 (267) Provision for doubtful accounts receivable................................... 96 84 352 Decrease (increase) in operating assets: Securities owned, at fair value.............................................. (2,258) (12,199) (899) Receivables from brokers, dealers and other.................................. (14,092) (2,468) 2,149 Due from affiliates.......................................................... 643 94 3,541 Investments.................................................................. 9,935 (5,742) (5,193) Other assets................................................................. (4,620) (6,930) (1,849) Increase (decrease) in operating liabilities: Accounts payable and accrued expenses........................................ 11,592 4,118 5,069 Payable to brokers, dealers and other........................................ 1,820 56 (113) Software royalties payable................................................... 1,407 389 480 Securities sold, not yet purchased, at fair value............................ 285 (1,223) 1,226 Due to affiliates............................................................ (443) 1,077 (321) Income taxes payable to affiliate............................................ 2,365 (147) 945 ---------- ---------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES.................................. 64,934 11,006 30,385 ---------- ---------- --------- Cash flows from investing activities: Purchase of premises and equipment........................................... (7,658) (15,679) (5,624) Sale of equity investment.................................................... 8,049 -- -- Investment in joint venture.................................................. (4,790) -- -- Capitalization of software development costs................................. (4,025) (4,422) (1,645) ---------- ---------- --------- NET CASH USED IN INVESTING ACTIVITIES...................................... (8,424) (20,101) (7,269) ---------- ---------- --------- Cash flows from financing activities: Purchase of common stock for treasury........................................ (6,250) (2,747) (1,721) Issuance of common stock..................................................... 12,962 2,500 -- ---------- ---------- --------- NET CASH PROVIDED BY/(USED) IN FINANCING ACTIVITIES........................ 6,712 (247) (1,721) ---------- ---------- --------- Effect of foreign currency translation on cash and cash equivalents.......... (161) -- -- Net increase (decrease) in cash and cash equivalents....................... 63,061 (9,342) 21,395 Cash and cash equivalents--beginning of year................................... 14,263 23,605 2,210 ---------- ---------- --------- Cash and cash equivalents--end of year......................................... $ 77,324 $ 14,263 $ 23,605 ---------- ---------- --------- ---------- ---------- --------- Supplemental cash flow information: Interest paid................................................................ $ 20 $ 146 $ 223 ---------- ---------- --------- ---------- ---------- --------- Income taxes paid to affiliate............................................... $ 30,296 $ 19,947 $ 18,798 ---------- ---------- --------- ---------- ---------- ---------
The accompanying Notes to Consolidated Financial Statements are integral parts of this statement. 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) ORGANIZATION AND BASIS OF PRESENTATION The Consolidated Financial Statements include the accounts of Investment Technology Group, Inc. and its wholly-owned subsidiaries ("ITGI" or the "Company"), which principally include: (1) ITG Inc., a broker-dealer in securities registered under the Exchange Act, (2) Investment Technology Group International Limited, which is a 50% partner in the ITG Europe joint venture, and (3) ITG Australia Holdings Pty Limited, which is a 50% partner in ITG Pacific Holdings Pty Limited. Investments in companies of fifty percent or less are accounted for using the equity method. Jefferies Group, Inc. ("Jefferies Group") owned over 80% of the Company's common stock at December 31, 1998. The Company is a leading provider of various sophisticated software solutions for automated institutional agency trade execution and the related services. The Company's line of business offers products and services to help clients access liquidity, execute trades more efficiently, and make better trading decisions. These software solution products include: POSIT, the world's largest intra-day electronic equity matching system; QuantEX, a fully-integrated trade routing, analysis and management system; ITG Platform, a tool that provides connection to POSIT, ITG's electronic trading desk and SuperDOT; ISIS, a set of analytical tools for systematically lowering the costs of trading; SmartServers, which offer server based implementation of trading strategies; ITG/OPT, a computer-based equity portfolio selection system; and research, development, sales and consulting services to clients. All material intercompany balances and transactions have been eliminated in consolidation. The consolidated financial statements reflect all adjustments, which are in the opinion of management, necessary for the fair statement of results. Jefferies Group and the Company have previously announced plans to separate Jefferies & Company and other Jefferies Group subsidiaries from the Company through a spin-off and upstream merger and the related transactions (see Note 16--Jefferies Group and the Company Plan to Separate into Two Independent Companies). (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES CASH AND CASH EQUIVALENTS The Company has defined cash and cash equivalents as highly liquid investments, with original maturities of less than ninety days, which are part of the cash management activities of the Company. FAIR VALUE OF FINANCIAL INSTRUMENTS Substantially all of the Company's financial instruments are carried at fair value or amounts approximating fair value. Cash and cash equivalents, securities owned and certain receivables, are carried at fair value or contracted amounts which approximate fair value due to the short period to maturity and repricing characteristics. Similarly, liabilities are carried at amounts approximating fair value. Securities sold, not yet purchased are valued at quoted market prices. SECURITIES TRANSACTIONS Revenues substantially consist of commission revenues. Receivable from brokers, dealers and other, net consists of commissions receivable and receivable from a partial liquidation of the TQA Arbitrage Fund L.P. Transactions in securities, commission revenues and related expenses are recorded on a trade-date basis. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Securities owned, at fair value consisted of highly liquid, variable rate municipal securities and auction rate preferred stock as of December 31, 1998 and 1997. CAPITALIZED SOFTWARE The Company capitalizes software development expenses where technological feasibility of the product has been established. Technological feasibility is established when the Company has completed all planning, designing, coding and testing activities that are necessary to establish that the product can be produced to meet design specifications. The assessment of recoverability of capitalized software development costs requires considerable judgment by management with respect to certain external factors, including, but not limited to, anticipated future gross revenues, estimated economic life and changes in software and hardware technologies. The Company is amortizing capitalized software costs using the straight-line method over the estimated economic useful life, the life of which is generally under two years. Amortization begins when the product is available for release to customers. GOODWILL In May 1991, Jefferies Group acquired Integrated Analytics Corporation ("IAC") and contributed its business to ITG in 1992. IAC's principal product, MarketMind, was used to develop the Company's QuantEX product. Goodwill, which represents the excess of purchase price for IAC over the fair value of the IAC net assets acquired, is amortized on a straight-line basis over ten years. The Company assesses the recoverability of this intangible asset by determining whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted future operating cash flows of the acquired operation. At December 31, 1998 and 1997, net goodwill amounted to $1.4 million and $1.9 million, net of accumulated amortization of $3.9 million and $3.4 million, respectively. INCOME TAXES The Company is a member of the Jefferies Group affiliated group ("Group") for purposes of filing a Federal income tax return (i.e., Jefferies Group owns more than 80% of the Company). The Company's tax liability is determined on a "separate return" basis. That is, the Company is required to pay to Jefferies Group its proportionate share of the consolidated tax liability plus any excess of its "separate" tax liability (assuming a separate tax return were to be filed by the Company) over its proportionate amount of the consolidated Group tax liability. Alternatively, Jefferies Group is required to pay the Company an "additional amount" to the extent the consolidated tax liability of the Group is decreased by reason of inclusion of the Company in the Group. Income taxes are accounted for on the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. PREMISES AND EQUIPMENT Premises and equipment are carried at cost and are depreciated using the straight-line method over the estimated useful lives of the assets (generally three to five years). Leasehold improvements are 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) amortized using the straight-line method over the lesser of the estimated useful lives of the related assets or the non-cancelable lease term. EXPENSES COMPENSATION AND EMPLOYEE BENEFITS include base salaries, bonuses, employment agency fees, part-time employee compensation, commissions paid to Jefferies & Company employees (note 8), capitalized software (note 4) and fringe benefits, including employer contributions for medical insurance, life insurance, retirement plans and payroll taxes. TRANSACTION PROCESSING consists of floor brokerage and clearing fees. SOFTWARE ROYALTIES are payments to BARRA, Inc., the Company's joint venture partner in POSIT. Royalty payments are calculated at an effective rate of 13% of adjusted POSIT revenues. OCCUPANCY AND EQUIPMENT includes rent, depreciation, amortization of leasehold improvements, maintenance, utilities, occupancy taxes and property insurance. CONSULTING is for equity research, product development and other activities that the Company believes it is advantageous to out-source. TELECOMMUNICATIONS AND DATA PROCESSING SERVICES include costs for computer hardware, office automation and workstations, data center equipment, market data services and voice, data, telex and network communications. NET LOSS ON LONG-TERM INVESTMENTS includes goodwill amortization, equity loss pick-up, and initial start up costs associated with ITG Europe and ITG Australia and the net gain on the sale of the investment in the LongView Group, Inc. SPIN-OFF COSTS include legal, accounting, consulting and various other expenses related to the Company's proposed spin-off and upstream merger discussed in Note 16. OTHER GENERAL AND ADMINISTRATIVE includes goodwill amortization, legal, audit, tax and promotional expenses. RESEARCH AND DEVELOPMENT All research and development costs are expensed as incurred. Research and development costs were $11.0 million, $8.4 million and $6.8 million for 1998, 1997 and 1996, respectively. USE OF ESTIMATES Management of the Company has made a number of estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses and the disclosure of contingent assets, liabilities, revenues and expenses to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. RECLASSIFICATIONS Certain reclassifications have been made to the prior years' amounts to conform to the current year's presentation. EARNINGS PER SHARE In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 128, EARNINGS PER SHARE, which is effective for financial statements for both interim and annual periods ending after December 15, 1997. As of December 31, 1997 the Company was required to change the method currently used to compute earnings per share and to restate all prior periods presented. Under the new SFAS, the Company is required to report both basic and diluted earnings per share. Basic earnings per share is determined by dividing earnings by the average number of shares of common stock outstanding, while diluted earnings per share is determined 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) by dividing earnings by the average number of shares of common stock adjusted for the dilutive effect of common stock equivalents. Earnings per share for 1997 and 1996 have been restated to conform to the provisions of this statement. DIVIDENDS Any future payments of dividends will be at the discretion of the Company's Board of Directors and will depend on the Company's financial condition, results of operations, capital requirements and other factors deemed relevant. The Company's revolving credit facility substantially limits the ability of the Company to pay dividends. (3) PREMISES AND EQUIPMENT The following is a summary of premises and equipment as of December 31, 1998 and 1997:
1998 1997 --------- --------- (DOLLARS IN THOUSANDS) Furniture, fixtures and equipment.................................... $ 29,007 $ 22,120 Leasehold improvements............................................... 6,505 6,257 --------- --------- Total............................................................ 35,512 28,377 Less: accumulated depreciation and amortization...................... 15,850 8,871 --------- --------- $ 19,662 $ 19,506 --------- --------- --------- ---------
JEFFERIES GROUP PREMISES AND EQUIPMENT Prior to November 1994, premises and equipment for the Company were purchased by Jefferies Group. Jefferies Group owns and recorded such assets. Jefferies Group charges the Company depreciation and amortization on such premises and equipment on a monthly basis. The following is a summary of such of premises and equipment as of December 31, 1998 and 1997 as recorded by Jefferies Group:
1998 1997 --------- --------- (DOLLARS IN THOUSANDS) Furniture, fixtures and equipment...................................... $ 4,803 $ 4,803 Leasehold improvements................................................. 942 942 --------- --------- Total.............................................................. 5,745 5,745 Less: accumulated depreciation and amortization........................ 5,745 5,297 --------- --------- $ -- $ 448 --------- --------- --------- ---------
Most of the capital expenditures in the two schedules above are for computer-related equipment. Depreciation and amortization expense amounted to $7,502,000, $4,614,000 and $2,034,000 in 1998, 1997 and 1996, respectively. 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) CAPITALIZED SOFTWARE COSTS The following is a summary of capitalized software costs as of December 31, 1998 and 1997:
1998 1997 --------- --------- (DOLLARS IN THOUSANDS) Capitalized software costs........................................... $ 14,235 $ 10,210 Less: accumulated amortization....................................... 7,785 4,237 --------- --------- Total............................................................ $ 6,450 $ 5,973 --------- --------- --------- ---------
Approximately $4,025,000 of software costs were capitalized in 1998 primarily for the development of new versions of QuantEX and ITG Platform. In addition, approximately $2,540,000 of total capitalized software costs were not subject to amortization as of December 31, 1998, as certain products have reached technological feasibility but are not yet available for release. Capitalized software costs are being amortized over one to two years, the life of which is generally less than two years. In 1998, 1997 and 1996, the Company included $3,548,000, $1,478,000 and $1,374,000, respectively, of amortized software costs in other general and administrative expenses. (5) INCOME TAXES The Company's operations are included in the consolidated Federal income tax return of Jefferies Group. All income tax liabilities/assets are due to/from Jefferies Group. Income tax expense (benefit) consists of the following components:
1998 1997 1996 --------- --------- --------- (DOLLARS IN THOUSANDS) Current Federal.................................................... $ 26,624 $ 14,220 $ 13,722 State...................................................... 11,241 6,226 5,971 --------- --------- --------- Total........................................................ 37,865 20,446 19,693 --------- --------- --------- Deferred Federal.................................................... (338) (62) (1,408) State...................................................... 14 (41) (619) --------- --------- --------- (324) (103) (2,027) --------- --------- --------- Total........................................................ $ 37,541 $ 20,343 $ 17,666 --------- --------- --------- --------- --------- ---------
Deferred income taxes are provided for temporary differences in reporting certain items, principally deferred compensation. The tax effects of temporary differences that gave rise to the deferred tax asset at December 31, 1998 and 1997 were as follows:
1998 1997 --------- --------- (DOLLARS IN THOUSANDS) Deferred compensation.................................................. $ 1,745 $ 2,144 State income tax....................................................... 1,345 870 Premises and equipment................................................. (916) (970) Other.................................................................. 610 416 --------- --------- Total.................................................................. $ 2,784 $ 2,460 --------- --------- --------- ---------
39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (5) INCOME TAXES (CONTINUED) At December 31, 1998 and 1997, the Company had income taxes payable to Jefferies Group of $3,853,000 and $1,488,000, respectively. The provision for income tax expense differs from the expected Federal income tax rate of 35% for 1998, 1997 and 1996 for the following reasons:
1998 1997 1996 --------- --------- --------- (DOLLARS IN THOUSANDS) Computed expected income tax expense......................... $ 28,327 $ 16,541 $ 14,350 Increase in income taxes resulting from: Amortization of goodwill................................... 192 268 192 State income tax expense, net of Federal income taxes....................................... 7,316 4,020 3,479 Research and development tax credits....................... (320) (320) (159) Non-taxable interest income................................ (664) (317) (473) Limited deductibility of meals and entertainment........... 228 209 168 Non-deductible spin-off expenses........................... 678 -- -- Dividend received deduction................................ (217) -- -- Non-deductible foreign losses.............................. 860 -- -- Other...................................................... 1,141 (58) 109 --------- --------- --------- Total income tax expense..................................... $ 37,541 $ 20,343 $ 17,666 --------- --------- --------- --------- --------- ---------
The Company believes that it is more likely than not that the deferred tax asset will be realized pursuant to the Company's Tax Sharing Agreement with Jefferies Group which entitles the Company to a compensating tax payment from Jefferies Group. (6) DEBT The Company has an intercompany borrowing agreement with Jefferies Group permitting the Company to borrow up to $15.0 million. Outstanding balances, if any, will be due March 31, 1999 and will accrue interest at 1.75% above the one month London Interbank Offering Rate. No amounts have ever been borrowed under this agreement. In 1998, we established a $2 million credit line with a bank to fund temporary regulatory capital shortfalls encountered periodically by ITG Australia. The lender charges us interest at the Federal Funds rate plus 1%. We lend amounts borrowed to the ITG Australia and charge interest at the Federal Funds rate plus 2%. At December 31, 1998, no amounts were outstanding under this bank credit line. (7) EMPLOYEE BENEFIT PLANS JEFFERIES GROUP PLANS All employees of the Company who are citizens or residents of the United States, who are 21 years of age, whose initial date of service was before April 1, 1997 and who have completed one year of service with the Company are covered by the Jefferies Group Employees' Pension Plan (the "Pension Plan"), a defined benefit plan. The plan is subject to the provisions of the Employee Retirement Income Security Act of 1974. However, benefit accruals for the Company's employees will cease as of February 15, 1999, and the entire benefit of each employee who was actually employed on December 31, 1998 will be vested at that time. Additionally, participants who have attained age 45 and are credited with at least 5 years of vesting service as of February 15, 1999 will receive enhanced benefits 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (7) EMPLOYEE BENEFIT PLANS (CONTINUED) under the Pension Plan, and the Company's employees whose initial date of service is on or after April 1, 1997 and prior to January 1, 1998 will retroactively become participants in the Pension Plan. The net periodic pension cost allocated to the Company was $819,000, $208,000 and $151,000 in 1998, 1997 and 1996, respectively. Jefferies Group incurs expenses related to various benefit plans covering substantially all employees, including an Employee Stock Purchase Plan ("ESPP") and a profit sharing plan, which includes a salary reduction feature designed to qualify under Section 401(k) of the Internal Revenue Code. As of February 1, 1998, employees of the Company were no longer eligible to participate in the ESPP and as of December 31, 1998 were no longer eligible to participate in the profit sharing plan. Jefferies Group also incurs expenses related to a Capital Accumulation Plan for certain officers and key employees of Jefferies Group and the Company. Participation in the plan was optional, with those who elected to participate agreeing to defer graduated percentages of their compensation. As of January 1, 1998 employees of the Company were no longer eligible to defer compensation in the Capital Accumulation Plan. This was replaced with the Company's Stock Unit Award Program as described below. For 1998, 1997 and 1996, the Company expensed and contributed to these plans $2,568,000, $2,096,000, and $1,590,000, respectively. ITG PLANS Effective as of January 1, 1999, all employees employed as of that date were immediately eligible to participate in the Investment Technology Group, Inc. Retirement Savings Plan and the Investment Technology Group, Inc. Guaranteed Money Purchase Pension Plan (the "Plans"). These Plans include all eligible compensation (base salary, bonus, commissions and overtime) up to the Internal Revenue Service annual maximum currently at $160,000. The Plans' features include a guaranteed company contribution of 3% of eligible pay to be made to all eligible employees regardless of participation in the Plans, a discretionary company contribution based on total consolidated company profits between 0% and 8% regardless of participation in the Plans and a Company matching contribution of 66 2/3% of voluntary employee contributions up to a maximum of 6% of eligible compensation per year. Effective January 1, 1998, selected members of senior management and key employees participated in the Stock Unit Award Program ("SUA"), a mandatory tax-deferred compensation program established under the 1994 Option Plan. Under the SUA, the selected participants of the Company are required to defer receipt of (and thus defer taxation on) a graduated portion of their total cash compensation for units representing common stock equal in value to 115% of the compensation deferred. Each participant is automatically granted units, as of the last day of each calendar quarter based on participant's actual or assigned compensation reduction. The units are at all times fully vested and non-forfeitable. The units are to be settled on or after the third anniversary of the date of grant. In 1998, the Company included the participant's deferral in compensation expense and recognized additional compensation expense of $477,000, which represents the 15% excess over the amount actually deferred by the participants. As of December 31, 1998, we had 111,683 units issued to the employees in the SUA. Such units are included in the calculation of diluted weighted average shares outstanding in order to determine diluted earnings per share. In 1997, the Board of Directors of the Company approved the ITG Employee Stock Purchase Plan ("ITG ESPP"). The ITG ESPP became effective February 1, 1998 and allows all full-time employees to 41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (7) EMPLOYEE BENEFIT PLANS (CONTINUED) purchase the Company's common stock at a 15% discount through automatic payroll deductions. The ITG ESPP is qualified as an employee stock purchase plan under Section 423 of the Internal Revenue Code. (8) RELATED PARTY TRANSACTIONS Jefferies & Company has provided to the Company pursuant to a service agreement, specified administrative services, at fixed monthly costs during 1998. Administrative services included accounting, payroll, compliance services, personnel services, legal services, data processing and telecommunications. All services were terminated on December 31, 1998, except for accounting services, and preparation of regulatory accounting reports, and certain personnel services, including administering certain employee benefit plans. The accounting and administrative services will continue until June 30, 1999 unless the Company terminates them earlier. The personnel services will continue until transfer of the assets under certain Jefferies Group employee benefit plans to Company Plans. The costs of such services to the Company during 1998, 1997 and 1996 were $1,186,000, $1,162,000 and $690,000, respectively. The Company has paid to Jefferies & Company an aggregate of $250,000, $247,000 and $502,000 for 1998, 1997 and 1996, respectively, as compensation to Jefferies & Company's account executives for introducing customers to POSIT pursuant to a revenue sharing agreement. This agreement terminates according to its terms on March 15, 1999. Such termination will not affect fees payable in accordance with the above formula with respect to customers introduced prior to January 1, 1999. Jefferies & Company has provided substantially all clearing services to the Company, pursuant to a Fully Disclosed Clearing Agreement. Aggregate costs of such services to the Company were $11.9 million, $9.3 million and $7.3 million during 1998, 1997 and 1996, respectively, included in transaction processing expenses. The Clearing Agreement is for a term of five years ending March 15, 1999 and is subject to termination at any time by either party on 180 days' written notice or upon default by the other party. ITG Inc. and Jefferies & Company are entering into a new clearing agreement on substantially similar terms as the Clearing Agreement with an initial term of January 2, 1999 to June 30, 2000. Various other affiliates of Jefferies Group, including Jefferies & Company, Inc., W & D Securities, Inc. and Jefferies International Limited, have provided other services to the Company. Certain occupancy and equipment expense has been provided to the Company at cost by Jefferies Group and Jefferies & Company. W & D Securities, Inc. performed certain execution services on the New York Stock Exchange and other exchanges for the Company. The cost of these execution services were $13.6 million, $10.8 million and $6.5 million in 1998, 1997 and 1996, respectively, and is primarily included in transaction processing expense. W & D Securities Inc. and ITG Inc. are entering into a new execution agreement on substantially similar terms as the current execution agreement with an initial term of January 2, 1999 to June 30, 2000. Included in other general and administrative expenses are fees paid to Jefferies International Limited of $767,000 for various broker and administrative services, of which $764,000 was reimbursed to the Company by its affiliates ITG Global Trading Incorporated and ITG International Limited. Included in revenues are financing costs of $911,000 paid to Jefferies & Company. Also, included in revenues, are licensing and consulting fees paid by W&D Securities, Inc. amounting to $165,000. 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (8) RELATED PARTY TRANSACTIONS (CONTINUED) Jefferies & Company has executed trades in an agency capacity for certain of its customers using ITG's services. Commission fees of $4.8 million, $3.1 million and $1.7 million in 1998, 1997 and 1996, respectively, and are included in the Company's revenues. Transactions with Jefferies Group and its affiliates are provided at arms length and are settled in the normal course of business by the Company. Throughout the Notes to Consolidated Financial Statements there are other related party transactions (see Notes 3, 5 and 7). (9) OFF BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT RISK In the normal course of business, the Company is involved in the execution of various customer securities transactions. Securities transactions are subject to the credit risk of counter party or customer nonperformance. However, transactions are collateralized by the underlying security, thereby reducing the associated risk to changes in the market value of the security through settlement date. Therefore, the settlement of these transactions is not expected to have a material effect upon the Company's financial statements. It is also the Company's policy to review, as necessary, the credit worthiness of each counter party and customer. (10) NET CAPITAL REQUIREMENT ITG Inc. is subject to the Uniform Net Capital Rule (Rule 15c3-1) under the Securities Exchange Act of 1934, which requires the maintenance of minimum net capital. ITG Inc. has elected to use the alternative method permitted by Rule 15c3-1, which requires that ITG Inc. maintain minimum net capital, as defined, equal to the greater of $250,000 or 2% of aggregate debit balances arising from customer transactions, as defined. At December 31, 1998, ITG Inc. had net capital of $72.0 million, which was $71.7 million in excess of required net capital. See Note 16 for the Company's proposed spin-off and upstream merger and the related dividend transactions. (11) ITGI STOCK OPTIONS At December 31, 1998, the Company had a non-compensatory stock option plan. Under the 1994 Stock Option and Long-term Incentive Plan (the "1994 Plan"), non-compensatory options to purchase 3,650,000 shares of the Company's Common Stock are reserved for issuance under the plan. Except for certain options granted in conjunction with the initial public offering in May 1994, the majority of the options will vest in one-third increments on the first, second, and third anniversaries of the date the options were priced. Shares of Common Stock which are attributable to awards which have expired, terminated or been canceled or forfeited during any calendar year are generally available for issuance or use in connection with future awards during such calendar year. Options that have been granted under the 1994 Stock Option and Long-Term Incentive Plan are exercisable on dates ranging from May 1997 to November 2007. The Plan will remain in effect until March 31, 2007, unless sooner terminated by the Board of Directors. After this date, no further stock options shall be granted but previously granted stock options shall remain outstanding in accordance with their applicable terms and conditions, as stated in the Stock Option and Long-term Incentive Plan. In June 1995, the Board of Directors adopted, subject to stockholder approval, the Non-Employee Directors' Plan. The Non-Employee Directors' Plan generally provides for an annual grant to each non-employee director of an option to purchase 2,500 shares of Common Stock. In addition, the 43 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (11) ITGI STOCK OPTIONS (CONTINUED) Non-Employee Directors' Plan provides for the automatic grant to a non-employee director, at the time he or she is initially elected, of a stock option to purchase 10,000 shares of Common Stock. Stock options granted under the Non-Employee Directors' Plan are non-qualified stock options having an exercise price equal to the fair market value of the Common Stock at the date of grant. All stock options become exercisable three months after the date of grant. Stock options granted under the Non-Employee Directors' Plan expire five years after the date of grant. A total of 125,000 shares of Common Stock are reserved and available for issuance under the Non-Employee Directors' Plan. At the time of the Company's initial public offering in May 1994, stock options to acquire an aggregate of 2,728,000 shares of Common Stock were granted to officers and other employees of the Company. Of these options granted, 2,442,000 shares were 100% vested on May 4, 1994. In 1995, the Compensation Committee of the Board of Directors determined that a value-neutral repricing of such options would serve to provide enhanced incentives to officers and employees of the Company. Accordingly, on the recommendation of the Compensation Committee, the Company offered a stock option repricing program pursuant to which all holders (options granted under the Non-Employee Directors' Plan were not eligible for repricing) of outstanding stock options with an exercise price of $13.00 per share were permitted to elect to exchange all or a portion of such stock options for a smaller number of stock options to acquire shares of Common Stock at exercise prices of $13.00, $11.06 and $9.13 per share. The repricing program was offered to option holders on a value neutral basis using the Black Scholes option valuation model. In all, approximately 66% of the outstanding stock options eligible for repricing were repriced at the election of the holders of such options. The Company applies APB Opinion No. 25 and related Interpretations in accounting for its non-compensatory stock option plans. Accordingly, no compensation costs have been recognized for its stock option plan. Had compensation cost for the Company's stock option plans been determined consistent with FASB Statement No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below (dollars in thousands, except per share data):
1998 1997 1996 --------- --------- --------- Net income.............................. As reported $ 43,394 $ 26,917 $ 23,335 Pro forma $ 41,713 $ 23,375 $ 20,279 Basic net earnings per share of common stock................................. As reported $ 2.36 $ 1.48 $ 1.28 Pro forma $ 2.27 $ 1.29 $ 1.11 Diluted earnings per share common stock................................. As reported $ 2.25 $ 1.42 $ 1.26 Pro forma $ 2.16 $ 1.23 $ 1.09
The fair value of each option grant is estimated on the date of grant using the Black Scholes option valuation model with the following weighted average assumptions used for grants in 1998 and 1997, respectively: zero dividend yield for all years; risk free interest rates of 5.5, 6.6 and 6.1 percent; expected volatility of 45, 54 and 49 percent; and expected lives of seven, five and four years. 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (11) ITGI STOCK OPTIONS (CONTINUED) A summary of the status of the Company's stock option plan as of December 31, 1998, 1997 and 1996 and changes during the years ended on those dates is presented below:
1998 1997 1996 ----------------------- ----------------------- ----------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE FIXED OPTIONS SHARES PRICE SHARES PRICE SHARES PRICE - ------------------------------------------------------- ---------- ----------- ---------- ----------- ---------- ----------- Outstanding at beginning of year....................... 3,458,216 $ 15.63 2,311,059 $ 11.96 2,271,351 $ 11.82 Granted................................................ 22,500 29.55 1,241,904 22.29 49,877 16.96 Exercised.............................................. (568,312) 12.94 (94,249) 13.00 -- -- Forfeited.............................................. (24,298) 20.43 (498) 13.00 (10,169) 13.00 ---------- ----------- ---------- ----------- ---------- ----------- Outstanding at end of year............................. 2,888,106 $ 16.21 3,458,216 $ 15.63 2,311,059 $ 11.96 ---------- ----------- ---------- ----------- ---------- ----------- ---------- ----------- ---------- ----------- ---------- ----------- Options exercisable at year-end........................ 2,722,282 $ 15.77 1,737,923 $ 15.25 None Weighted average fair value per share of options granted during the year.............................. $ 15.68 $ 10.76 $ 7.93
The following table summarizes information about fixed stock options outstanding at December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------ ------------------------- NUMBER WEIGHTED NUMBER OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED AT REMAINING AVERAGE AT AVERAGE DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE RANGE OF EXERCISE PRICES 1998 LIFE (YEARS) PRICE 1998 PRICE - -------------------------------------------------- ------------ --------------- ----------- ------------ ----------- $ 7.50 10.00.................................... 445,909 1.9 $ 9.08 445,909 $ 9.08 11.00 15.00.................................... 1,167,117 0.9 12.30 1,167,117 12.30 16.00 20.00.................................... 157,976 3.4 19.22 73,256 18.94 21.00 25.00.................................... 1,019,604 3.1 22.21 1,010,000 22.19 26.00 30.00.................................... 92,500 8.4 27.80 26,000 27.97 31.00 32.10.................................... 5,000 4.3 32.10 -- -- ------------ ------------ $ 7.50 32.10.................................... 2,888,106 2.2 $ 16.21 2,722,282 $ 15.77 ------------ ------------ ------------ ------------
During 1998, the Company granted 111,683 units representing restricted stock awards under our Stock Unit Award deferred compensation plan. See note 7--Employee Benefit Plans. Although the 1994 Plan allows for the granting of performance-based stock options, no such options were granted during 1998, 1997 and 1996 and no such options were outstanding at December 31, 1998, 1997 and 1996. Restricted stock of 24,219 shares was granted in 1997 as part of the Company's settlement for its equity investment in The LongView Group. The restriction period was for one year. In 1997, the Company granted to Scott P. Mason, its then President and CEO, a non-qualified stock option to acquire 1,000,000 shares of Common Stock, having an exercise price of $22.175. During 1997, 400,000 of these options became exercisable. Upon Mr. Mason's death in 1998, the remaining 600,000 options were deemed by the board to be exercisable. The effects of such decision resulted in additional compensation expense of $2.8 million at December 31, 1998. The options expire in September 2000. 45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (12) INTEREST EXPENSE Included in other general and administrative expenses is interest expense of $20,000, $146,000 and $223,000 for 1998, 1997 and 1996, respectively. (13) ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses at December 31, 1998 and 1997 consisted of the following;
1998 1997 --------- --------- (DOLLARS IN THOUSANDS) Accounts payable and accrued expenses................................ $ 6,581 $ 4,150 Deferred compensation plan........................................... 3,801 -- Deferred options..................................................... 2,778 64 Accrued soft dollar expenses......................................... 6,692 3,125 Accrued bonus expense................................................ 1,757 2,849 Accrued rent expense................................................. 2,445 2,276 Deferred revenues.................................................... 100 200 --------- --------- Total............................................................ $ 24,154 $ 12,664 --------- --------- --------- ---------
(14) LEASE COMMITMENTS The Company entered into lease and sublease agreements with third parties for certain offices and equipment, which expire at various dates through 2005. Rent expense for the years ended December 31, 1998, 1997 and 1996 was $3.2 million, $2.6 million and $1.9 million, respectively. Minimum future rentals under non-cancelable operating leases follow (dollars in thousands):
YEAR ENDING DECEMBER 31, - ----------------------------------------------------------------------------------- 1999............................................................................... $ 3,059 2000............................................................................... 3,116 2001............................................................................... 2,712 2002............................................................................... 2,524 2003............................................................................... 2,914 Thereafter......................................................................... 18,818 --------- Total.......................................................................... $ 33,143 --------- ---------
(15) EARNINGS PER SHARE Net earnings per share of common stock is based upon an adjusted weighted average number of shares of common stock outstanding. The average number of outstanding shares for the years ended December 31, 1998, 1997 and 1996 were 18.4 million, 18.2 million and 18.3 million, respectively. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (15) EARNINGS PER SHARE (CONTINUED) The following is a reconciliation of the basic and diluted earnings per share computations for the years ended December 31, 1998, 1997 and 1996.
1998 1997 1996 --------- --------- --------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Net income for basic and diluted earnings per share.............................. $ 43,394 $ 26,917 $ 23,335 --------- --------- --------- --------- --------- --------- Shares of common stock and common stock equivalents: Average number of common shares................................................ 18,365 18,178 18,284 --------- --------- --------- Average shares used in basic computation....................................... 18,365 18,178 18,284 Effect of dilutive securities--options......................................... 924 762 302 --------- --------- --------- Average shares used in diluted computation..................................... 19,289 18,940 18,586 --------- --------- --------- --------- --------- --------- Earnings per share: Basic.......................................................................... $ 2.36 $ 1.48 $ 1.28 --------- --------- --------- --------- --------- --------- Diluted........................................................................ $ 2.25 $ 1.42 $ 1.26 --------- --------- --------- --------- --------- ---------
(16) JEFFERIES GROUP AND THE COMPANY PLAN TO SEPARATE INTO TWO INDEPENDENT COMPANIES On March 17, 1998, the Company announced plans for the separation of Jefferies & Company and other Jefferies Group subsidiaries from the Company through a series of transactions, including a special cash dividend, the transfer of most of Jefferies Group's assets and liabilities (other than those related to the Company), a spin-off and an upstream merger (collectively, the "Transactions"). Upon the consummation of the upstream merger and the related transactions, the stockholders of Jefferies Group will be stockholders of the Company and Jefferies Group will cease to be the Company's parent. First, the Company will pay a special cash dividend of $4.00 per share, payable pro rata to all of its stockholders of record, including Jefferies Group (the "Special Cash Dividend"). The aggregate amount of the Special Cash Dividend will be up to $75.0 million, of which the Company will pay $60.0 million to Jefferies Group. Following the payment of the Special Cash Dividend, Jefferies Group will transfer all of its assets (other than its equity interest in the Company) and all of its liabilities (other than liabilities related to the Company) to a new company ("New Jefferies"). After such transfers have been completed and certain other conditions have been satisfied, Jefferies Group will distribute (the "Spin-Off") all of the outstanding common stock of New Jefferies pro rata to its stockholders. The Spin-Off will be followed immediately by a tax-free merger of the Company into Jefferies Group, with the Company's public shareholders receiving shares of Jefferies Group. Jefferies Group will then be renamed Investment Technology Group, Inc. ("New ITGI"). Based on the number of shares of Jefferies Group common stock expected to be outstanding on the date of the spin-off and upstream merger (approximately 23,900,000) and the number of shares of the Company's common stock held by Jefferies Group (15,000,000), the Company's public stockholders other than Jefferies Group will receive approximately 1.59 shares of common stock of New ITGI for each share of the Company's common stock held by them. 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (16) JEFFERIES GROUP AND THE COMPANY PLAN TO SEPARATE INTO TWO INDEPENDENT COMPANIES (CONTINUED) The upstream merger and the related transactions are contingent on a number of factors, including receipt of all Board of Directors and shareholder approvals of Jefferies Group and the Company, receipt of a favorable tax ruling from the Internal Revenue Service and other required regulatory and contractual approvals. The upstream merger and the related transactions are currently expected to close in April 1999. (17) CONTINGENCIES In 1998, the Company received a "30-day letter" proposing certain adjustments which, if sustained, would result in a tax deficiency of approximately $9.6 million plus interest. The adjustments proposed relate to (i) the disallowance of deductions taken in connection with the termination of certain compensation plans at the time of our initial public offering in 1994 and (ii) the disallowance of tax credits taken in connection with certain research and development expenditures. We believe that the tax benefits in question were taken properly and intend to vigorously contest the proposed adjustments. Based on the facts and circumstances known at this time, we are unable to predict when this matter will be resolved or the costs associated with its resolution. (18) SUPPLEMENTARY FINANCIAL INFORMATION (UNAUDITED) The following tables set forth certain unaudited financial data for the Company's quarterly operations in 1998, 1997 and 1996. The following information has been prepared on the same basis as the annual information presented elsewhere in this report and, in the opinion of management, includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the information for the quarterly periods presented. The operating results for any quarter are not necessarily indicative of results for any future period. 48 INVESTMENT TECHNOLOGY GROUP, INC.
YEAR ENDED DECEMBER YEAR ENDED DECEMBER 31, 1998 31, 1997 -------------------------------------------------- ----------- FOURTH THIRD SECOND FIRST FOURTH QUARTER QUARTER QUARTER QUARTER QUARTER ----------- ----------- ----------- ----------- ----------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Total Revenue............................................. $ 62,216 $ 57,697 $ 50,905 $ 41,387 $ 36,272 Expenses: Compensation and employee benefits...................... 14,500 14,152 12,225 10,585 8,999 Transaction processing.................................. 7,639 6,917 6,710 5,564 5,718 Software royalties...................................... 4,072 4,416 3,774 2,985 2,579 Occupancy and equipment................................. 3,195 3,071 2,823 2,797 2,814 Consulting.............................................. 767 357 393 821 487 Telecommunications and data processing services......... 1,853 2,179 2,325 1,781 1,988 Net (gain) loss on long-term investments................ 1,749 (3,632) 1,085 1,002 -- Spin-off costs.......................................... 1,083 479 374 -- 297 Other general and administrative........................ 3,871 4,027 2,529 2,712 2,742 ----------- ----------- ----------- ----------- ----------- Total expenses........................................ 38,729 31,966 32,238 28,337 25,624 ----------- ----------- ----------- ----------- ----------- Income before income tax expense.......................... 23,487 25,731 18,667 13,050 10,648 Income tax expense........................................ 11,267 11,847 8,739 5,688 4,739 ----------- ----------- ----------- ----------- ----------- Net income................................................ $ 12,220 $ 13,884 $ 9,928 $ 7,362 $ 5,909 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Basic net earnings per share of common stock.............. $ 0.66 $ 0.75 $ 0.54 $ 0.40 $ 0.32 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Diluted net earnings per share of common stock............ $ 0.63 $ 0.72 $ 0.52 $ 0.38 $ 0.31 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Basic weighed average shares outstanding.................. 18,484 18,420 18,330 18,233 18,188 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Diluted weighted average shares and common stock equivalents outstanding................................. 19,468 19,234 19,208 19,154 19,107 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- YEAR ENDED DECEMBER 31, 1996 ------------------------ THIRD SECOND FIRST FOURTH THIRD QUARTER QUARTER QUARTER QUARTER QUARTER ----------- ----------- ----------- ----------- ----------- Total Revenue............................................. $ 33,437 $ 36,679 $ 30,654 $ 29,892 $ 28,684 Expenses: Compensation and employee benefits...................... 7,599 7,007 6,874 6,947 6,225 Transaction processing.................................. 5,110 5,682 4,903 3,922 4,340 Software royalties...................................... 2,306 2,581 2,382 2,283 2,272 Occupancy and equipment................................. 2,521 2,010 1,859 1,928 1,899 Consulting.............................................. 585 574 371 494 452 Telecommunications and data processing services......... 1,504 2,156 957 1,396 1,217 Net (gain) loss on long-term investments................ -- -- -- -- -- Spin-off costs.......................................... -- -- -- -- -- Other general and administrative........................ 2,486 2,744 1,947 1,614 2,072 ----------- ----------- ----------- ----------- ----------- Total expenses........................................ 22,111 22,754 19,293 18,584 18,477 ----------- ----------- ----------- ----------- ----------- Income before income tax expense.......................... 11,326 13,925 11,361 11,308 10,207 Income tax expense........................................ 4,857 5,917 4,830 4,813 4,330 ----------- ----------- ----------- ----------- ----------- Net income................................................ $ 6,469 $ 8,008 $ 6,531 $ 6,495 $ 5,877 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Basic net earnings per share of common stock.............. $ 0.36 $ 0.44 $ 0.36 $ 0.36 $ 0.32 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Diluted net earnings per share of common stock............ $ 0.34 $ 0.43 $ 0.35 $ 0.35 $ 0.32 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Basic weighed average shares outstanding.................. 18,144 18,128 18,254 18,255 18,256 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- Diluted weighted average shares and common stock equivalents outstanding................................. 19,104 18,702 18,809 18,727 18,558 ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- ----------- SECOND FIRST QUARTER QUARTER ----------- ----------- Total Revenue............................................. $ 26,313 $ 26,667 Expenses: Compensation and employee benefits...................... 6,006 5,869 Transaction processing.................................. 3,776 3,699 Software royalties...................................... 2,022 2,221 Occupancy and equipment................................. 1,257 1,027 Consulting.............................................. 692 854 Telecommunications and data processing services......... 925 1,251 Net (gain) loss on long-term investments................ -- -- Spin-off costs.......................................... -- -- Other general and administrative........................ 1,783 2,112 ----------- ----------- Total expenses........................................ 16,461 17,033 ----------- ----------- Income before income tax expense.......................... 9,852 9,634 Income tax expense........................................ 4,285 4,238 ----------- ----------- Net income................................................ $ 5,567 $ 5,396 ----------- ----------- ----------- ----------- Basic net earnings per share of common stock.............. $ 0.30 $ 0.29 ----------- ----------- ----------- ----------- Diluted net earnings per share of common stock............ $ 0.30 $ 0.29 ----------- ----------- ----------- ----------- Basic weighed average shares outstanding.................. 18,262 18,364 ----------- ----------- ----------- ----------- Diluted weighted average shares and common stock equivalents outstanding................................. 18,572 18,435 ----------- ----------- ----------- -----------
Earnings per share for quarterly periods are based on average common shares outstanding in individual quarters; thus, the sum of earnings per share of the quarters may not equal the amounts reported for the full year. Earnings per share for prior periods have been restated to conform with Statement of Financial Accounting Standards No. 128, EARNINGS PER SHARE. 49 INVESTMENT TECHNOLOGY GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998 YEAR ENDED DECEMBER 31, 1997 -------------------------------------------------- ------------------------------------- FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER ----------- ----------- ----------- ----------- ----------- ----------- ----------- (AS A PERCENTAGE OF TOTAL REVENUES) Total Revenue....................... 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Expenses: Compensation and employee benefits........................ 23.3 24.5 24.0 25.6 24.8 22.7 19.1 Transaction processing............ 12.3 12.0 13.2 13.7 15.8 15.3 15.5 Software royalties................ 6.5 7.7 7.4 7.2 7.1 6.9 7.0 Occupancy and equipment........... 5.1 5.3 5.5 6.8 7.8 7.5 5.5 Consulting........................ 1.2 0.6 0.8 2.0 1.3 1.7 1.6 Telecommunications and data processing services............. 3.0 3.8 4.6 4.3 5.5 4.5 5.9 Net (gain) loss on investments.... 2.8 (6.3) 2.1 2.4 0.2 0.0 0.0 Spin-off costs.................... 1.7 0.8 0.7 0.0 0.0 0.0 0.0 Other general and administrative.................. 6.2 7.0 5.0 6.6 7.3 7.4 7.5 ----- ----- ----- ----- ----- ----- ----- Total expenses.................. 62.2 55.4 63.3 68.5 70.7 66.0 62.1 ----- ----- ----- ----- ----- ----- ----- Income before income tax expense.... 37.8 44.6 36.7 31.5 29.3 34.0 37.9 Income tax expense................ 18.1 20.5 17.2 13.7 13.0 14.7 16.1 ----- ----- ----- ----- ----- ----- ----- Net income.......................... 19.6% 24.1% 19.5% 17.8% 16.3% 19.3% 21.8% ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- YEAR ENDED DECEMBER 31, 1996 -------------------------------------------------- FIRST FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER QUARTER ----------- ----------- ----------- ----------- ----------- Total Revenue....................... 100.0% 100.0% 100.0% 100.0% 100.0% Expenses: Compensation and employee benefits........................ 22.4 23.2 21.7 22.8 22.0 Transaction processing............ 16.0 13.1 15.1 14.4 13.9 Software royalties................ 7.8 7.6 7.9 7.7 8.3 Occupancy and equipment........... 6.1 6.4 6.6 4.8 3.9 Consulting........................ 1.2 1.7 1.6 2.6 3.2 Telecommunications and data processing services............. 3.1 4.7 4.2 3.5 4.7 Net (gain) loss on investments.... 0.0 0.0 0.0 0.0 0.0 Spin-off costs.................... 0.0 0.0 0.0 0.0 0.0 Other general and administrative.................. 6.4 5.4 7.2 6.8 7.9 ----- ----- ----- ----- ----- Total expenses.................. 63.0 62.1 64.3 62.6 63.9 ----- ----- ----- ----- ----- Income before income tax expense.... 37.0 37.9 35.7 37.4 36.1 Income tax expense................ 15.7 16.2 15.2 16.2 15.9 ----- ----- ----- ----- ----- Net income.......................... 21.3% 21.7% 20.5% 21.2% 20.2% ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
50 (19) SUBSEQUENT EVENTS (UNAUDITED) On March 16, 1999, the Company entered into an agreement with a bank to borrow, effective upon the closing of the merger, up to $20 million (the "Commitment") on a revolving basis to enable ITG Inc. to satisfy its regulatory net capital requirements. The Commitment will expire on March 14, 2000. Any amounts drawn may be prepaid at any time, but no later than March 15, 2001. We have agreed to pay an up-front fee totaling 1.5% of the Commitment and will incur a fee at a rate per annum equal to 0.35% on the daily amount of the unused Commitment to March 13, 2000. The interest rate on any amounts drawn will be prime; if such amounts are not repaid within two weeks, the interest rate will increase to prime plus 2%. The credit facility is secured by a pledge of the stock of ITG Inc., ITG Ventures, Inc. and ITG Global Trading Incorporated. This agreement limits the Company's ability to pay cash dividends or incur indebtedness and requires the Company to comply with certain financial covenants. The intercompany borrowing agreement with Jefferies Group terminated on March 15, 1999. In addition, the credit line established with our bank to fund temporary regulatory capital shortfalls encountered periodically by ITG Australia will not be permitted during the period that the revolving credit agreement discussed above is effective. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with accountants reportable herein. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information with respect to this item will be contained in the Proxy Statement for the 1999 Annual Meeting of Stockholders, which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information with respect to this item will be contained in the Proxy Statement for the 1999 Annual Meeting of Stockholders, which is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information with respect to this item will be contained in the Proxy Statement for the 1999 Annual Meeting of Stockholders, which is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information with respect to this item will be contained in the Proxy Statement for the 1999 Annual Meeting of Stockholders, which is incorporated herein by reference. 51 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a)(1) Financial Statements Included in Part II of this report:
PAGE ----- Independent Auditors' Report........................................................... 30 Consolidated Statements of Income...................................................... 31 Consolidated Statements of Financial Condition......................................... 32 Consolidated Statements of Changes in Stockholders' Equity............................. 33 Consolidated Statements of Cash Flows.................................................. 34 Notes to Consolidated Financial Statements............................................. 35
(a)(2) Schedules Schedules are omitted because the required information either is not applicable or is included in the financial statements or the notes thereto. (a)(3) Exhibits 2.1* Agreement and Plan of Merger, dated as of March 17, 1999, by and between Jefferies Group, Inc. and the Company. 2.2* Distribution Agreement, dated as of March 17, 1999, by and among Jefferies Group, Inc. and JEF Holding Company, Inc. 3.1 Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to Registration Statement Number 33-76474 on Form S-1 as declared effective by the Securities and Exchange Commission on May 4, 1994 (the "Registration Statement")). 3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 to Registration Statement). 4.1 Form of Certificate for Common Stock of the Company (incorporated by reference to Exhibit 4.1 to Registration Statement). 10.1 Joint Venture Agreement, dated October 1, 1987, between Jefferies & Company, Inc. and BARRA, Inc. (formerly Barr Rosenberg Associates, Inc.) (incorporated by reference to Exhibit 10.1.1 to Registration Statement). 10.1.1 Exclusive Software License Agreement, dated October 1, 1987, between the POSIT Joint Venture and Jefferies & Company, Inc. (incorporated by reference to Exhibit 10.1.2 to Registration Statement). 10.1.2 Amendment No. 1 to Exclusive Software License Agreement, dated August 1, 1990, between the POSIT Joint Venture and Jefferies & Company, Inc. (incorporated by reference to Exhibit 10.1.3 to Registration Statement). 10.1.3 Consent of BARRA, Inc. to the assignment to the Company of the interests of Jefferies & Company, Inc. in the Posit Joint Venture referenced in item 10.1.1 and rights in the Software License Agreement referenced in item 10.1.2 (incorporated by reference to Exhibit 10.1.4 to Registration Statement). 10.1.4* Joint Venture Agreement, dated as of November 17, 1998, by and among Investment Technology Group International Limited, Societe Generale, Investment Technology Group SG Limited, Investment Technology Group Limited and Investment Technology Group Europe Limited. 10.2 Service Agreement, dated March 15, 1994, by and between Jefferies & Company, Inc. and ITG Inc. (incorporated by reference to Exhibit 10.2.2 to Registration Statement).
52 10.2.1* Amendment No. 1 to Service Agreement, dated as of January 1, 1999, by and between Jefferies & Company, Inc. and ITG Inc. 10.2.2* Execution Agreement, dated as of January 1, 1999, by and between W & D Securities, Inc. and ITG Inc. 10.2.3* Fully Disclosed Clearing Agreement, dated as of January 1, 1999, by and between Jefferies & Company, Inc. and ITG Inc. 10.2.4* Benefits Agreement, dated as of March 17, 1999, by and between Jefferies Group, Inc. and JEF Holding Company, Inc. 10.2.5* Amended and Restated Tax Sharing Agreement, dated as of March 17, 1999, by and among Jefferies Group, Inc., JEF Holding Company, Inc. and the Company. 10.2.6* Tax Sharing and Indemnification Agreement, dated as of March 17, 1999, by and among Jefferies Group, Inc., JEF Holding Company, Inc. and the Company. 10.2.7* Credit Agreement dated as of March 16, 1999, among Investment Technology Group, Inc., as Borrower and the Bank of New York, as Lender 10.3. Employment Agreement between the Company, ITG Inc. and Raymond L. Killian, Jr. (incorporated by reference to Exhibit 10.3.2 to Registration Statement). 10.3.1 Amendment No. 2 to Employment Agreement between Raymond L. Killian, Jr., the Company and ITG Inc. (incorporated by reference to Exhibit 10.3.2A to the Annual Report on Form 10-K for the year ended December 31, 1996.) 10.3.2 Employment Agreement between the Company and Scott P. Mason. (incorporated by reference to Exhibit 0.3.18 to the Annual Report on Form 10-K for the year ended December 31, 1996). 10.3.3 Stock Option Agreement between the Company and Scott P. Mason (incorporated by reference to Exhibit 10.3.3 to Registration Statement). 10.3.4 Form of Employment Agreement between the Company and Joshua D. Rose (incorporated by reference to Exhibit 10.3.4 to Registration Statement). 10.3.5 Employment Agreement between the Company, ITG Inc. and Yossef A. Beinart (incorporated by reference to Exhibit 10.3.6 to Registration Statement Number 33-76474 on Amendment Number 3 to Form S-1 as filed with the Securities and Exchange Commission on May 2, 1994). 10.3.6 Amendment to Form of Employment Agreement between the Company, ITG Inc. and Senior Vice Presidents Electing to Reprice Stock Options. (incorporated by reference to Exhibit 10.3.4A to the Annual Report on Form 10-K for the year ended December 31, 1996). 10.4. Amended and Restated 1994 Stock Option and Long-Term Incentive Plan. (incorporated by reference to Exhibit A to the 1997 Annual Meeting Proxy Statement). 10.4.1 Non-Employee Directors' Stock Option Plan. (incorporated by reference to Appendix A to the 1996 Annual Meeting Proxy Statement). 10.4.2 Capital Accumulation Plan for Key Employees of Jefferies Group, Inc. (incorporated by reference to Exhibit 10.3.7 to Registration Statement). 10.4.3 Form of Stock Option Agreement between the Company and certain employees of the Company (incorporated by reference to Exhibit 10.3.3 to Registration Statement). 10.4.4 Pay-For-Performance Incentive Plan (incorporated by reference to Exhibit B to the 1997 Annual Meeting Proxy Statement). 10.4.5 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.3.1A to the Annual Report on Form 10-K for the year ended December 31, 1997)
53 10.4.6* 1998 Amended and Restated Stock Unit Award Program 10.5. Lease, dated July 11, 1990, between AEW/LBA Acquisition Co. LLC (as successor to 400 Corporate Pointe, Ltd.) and Integrated Analytics Corporation, as assigned by Integrated Analytics Corporation to the Company (incorporated by reference to Exhibit 10.3.3 to Registration Statement). 10.5.1 First Amendment to Lease, dated as of June 1, 1995, between AEW/LBA Acquisition Co. LLC (as successor to 400 Corporate Pointe, Ltd.) and the Company(incorporated by reference to Exhibit 10.5.7 to Annual Report of Form 10-K for the year ended December 31, 1996). 10.5.2 Second Amendment to Lease, dated as of December 5, 1996, between Arden Realty Limited Partnership and the Company. (incorporated by reference to Exhibit 10.5.2 to the Annual Report on Form 10-K for the year ended December 31, 1997.) 10.5.3 Lease, dated October 4, 1996, between Spartan Madison Corp. and the Company. (incorporated by reference to Exhibit 10.5.3 to the Annual Report on Form 10-K for the year ended December 31, 1997.) 10.5.4 First Supplemental Agreement, dated as of January 29, 1997, between Spartan Madison Corp. and the Company. (incorporated by reference to Exhibit 10.5.4 to the Annual Report on Form 10-K for the year ended December 31, 1997.) 10.5.5 Second Supplemental Agreement, dated as of November 25, 1997, between Spartan Madison Corp. and the Company. (incorporated by reference to Exhibit 10.5.5 to the Annual Report on Form 10-K for the year ended December 31, 1997.) 10.5.6 Lease dated March 10, 1995, between Boston Wharf Co. and the Company. (incorporated by reference to Exhibit 10.5.6 to the Annual Report on Form 10-K for the year ended December 31, 1997.) 10.6 Form of QuantEX Software and Hardware License Agreement (incorporated by reference to Exhibit 10.3.3 to Registration Statement). 21* Subsidiaries of Company. 23* Consent of KPMG LLP. 27* Financial Data Schedule.
- ------------------------ * Filed herewith (b) Reports on Form 8-K. On November 6, 1998, the Company filed a Form 8-K reporting updated financial information regarding the previously announced plan by Jefferies Group and the Company to separate Jefferies Group's 100% owned subsidiary, Jefferies & Company and Jefferies Group's 80.5% owned subsidiary, the Company, through a proposed spin-off and related transactions. (c) Index to Exhibits See list of exhibits at Item 14(a)(3) above and exhibits following. 54 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. INVESTMENT TECHNOLOGY GROUP, INC. By: /s/ RAYMOND L. KILLIAN, JR. ----------------------------------------- Raymond L. Killian, Jr. Chairman of the Board, Chief Executive Officer and President
Dated: March 18, 1999 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons and on behalf of the Registrant in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ RAYMOND L. KILLIAN, JR. Chairman of the Board, - ------------------------------ Chief Executive Officer March 18, 1999 Raymond L. Killian, Jr. President and Director Senior Vice President and /s/ JOHN R. MACDONALD Chief Financial Officer - ------------------------------ (Principal Financial March 18, 1999 John R. MacDonald Officer) /s/ ANGELO BULONE Vice President and - ------------------------------ Controller (Principal March 18, 1999 Angelo Bulone Accounting Officer) /s/ FRANK E. BAXTER - ------------------------------ Director March 18, 1999 Frank E. Baxter /s/ NEAL S. GARONZIK - ------------------------------ Director March 18, 1999 Neal S. Garonzik /s/ WILLIAM I JACOBS - ------------------------------ Director March 18, 1999 William I Jacobs /s/ ROBERT L. KING - ------------------------------ Director March 18, 1999 Robert L. King /s/ MARK A. WOLFSON - ------------------------------ Director March 18, 1999 Mark A. Wolfson
55 EXHIBIT INDEX
SEQUENTIALLY EXHIBITS NUMBERED NUMBER DESCRIPTION PAGE - --------- ------------------------------------------------------------------------------------------ ------------- 2.1* Agreement and Plan of Merger, dated as of March 17, 1999, by and between Jefferies Group, Inc. and the Company. 2.2* Distribution Agreement, dated as of March 17, 1999, by and among Jefferies Group, Inc. and JEF Holding Company, Inc. 3.1 Certificate of Incorporation of the Company (incorporated by reference to Exhibit 3.1 to Registration Statement Number 33-76474 on Form S-1 as declared effective by the Securities and Exchange Commission on May 4, 1994 (the "Registration Statement")). 3.2 By-laws of the Company (incorporated by reference to Exhibit 3.2 to Registration Statement). 4.1 Form of Certificate for Common Stock of the Company (incorporated by reference to Exhibit 4.1 to Registration Statement). 10.1 Joint Venture Agreement, dated October 1, 1987, between Jefferies & Company, Inc. and BARRA, Inc. (formerly Barr Rosenberg Associates, Inc.) (incorporated by reference to Exhibit 10.1.1 to Registration Statement). 10.1.1 Exclusive Software License Agreement, dated October 1, 1987, between the POSIT Joint Venture and Jefferies & Company, Inc. (incorporated by reference to Exhibit 10.1.2 to Registration Statement). 10.1.2 Amendment No. 1 to Exclusive Software License Agreement, dated August 1, 1990, between the POSIT Joint Venture and Jefferies & Company, Inc. (incorporated by reference to Exhibit 10.1.3 to Registration Statement). 10.1.3 Consent of BARRA, Inc. to the assignment to the Company of the interests of Jefferies & Company, Inc. in the Posit Joint Venture referenced in item 10.1.1 and rights in the Software License Agreement referenced in item 10.1.2 (incorporated by reference to Exhibit 10.1.4 to Registration Statement). 10.1.4* Joint Venture Agreement, dated as of November 17, 1998, by and among Investment Technology Group International Limited, Societe Generale, Investment Technology Group SG Limited, Investment Technology Group Limited and Investment Technology Group Europe Limited. 10.2 Service Agreement, dated March 15, 1994, by and between Jefferies & Company, Inc. and ITG Inc. (incorporated by reference to Exhibit 10.2.2 to Registration Statement). 10.2.1* Amendment No. 1 to Service Agreement, dated as of January 1, 1999, by and between Jefferies & Company, Inc. and ITG Inc. 10.2.2* Execution Agreement, dated as of January 1, 1999, by and between W & D Securities, Inc. and ITG Inc. 10.2.3* Fully Disclosed Clearing Agreement, dated as of January 1, 1999, by and between Jefferies & Company, Inc. and ITG Inc. 10.2.4* Benefits Agreement, dated as of March 17, 1999, by and between Jefferies Group, Inc. and JEF Holding Company, Inc.
56
SEQUENTIALLY EXHIBITS NUMBERED NUMBER DESCRIPTION PAGE - --------- ------------------------------------------------------------------------------------------ ------------- 10.2.5* Amended and Restated Tax Sharing Agreement, dated as of March 17, 1999, by and among Jefferies Group, Inc., JEF Holding Company, Inc. and the Company. 10.2.6* Tax Sharing and Indemnification Agreement, dated as of March 17, 1999, by and among Jefferies Group, Inc., JEF Holding Company, Inc. and the Company. 10.2.7* Credit Agreement dated as of March 16, 1999, among Investment Technology Group, Inc., as Borrower and the Bank of New York, as Lender 10.3. Employment Agreement between the Company, ITG Inc. and Raymond L. Killian, Jr. (incorporated by reference to Exhibit 10.3.2 to Registration Statement). 10.3.1 Amendment No. 2 to Employment Agreement between Raymond L. Killian, Jr., the Company and ITG Inc. (incorporated by reference to Exhibit 10.3.2A to the Annual Report on Form 10-K for the year ended December 31, 1996.) 10.3.2 Employment Agreement between the Company and Scott P. Mason. (incorporated by reference to Exhibit 0.3.18 to the Annual Report on Form 10-K for the year ended December 31, 1996). 10.3.3 Stock Option Agreement between the Company and Scott P. Mason (incorporated by reference to Exhibit 10.3.3 to Registration Statement). 10.3.4 Form of Employment Agreement between the Company and Joshua D. Rose (incorporated by reference to Exhibit 10.3.4 to Registration Statement). 10.3.5 Employment Agreement between the Company, ITG Inc. and Yossef A. Beinart (incorporated by reference to Exhibit 10.3.6 to Registration Statement Number 33-76474 on Amendment Number 3 to Form S-1 as filed with the Securities and Exchange Commission on May 2, 1994). 10.3.6 Amendment to Form of Employment Agreement between the Company, ITG Inc. and Senior Vice Presidents Electing to Reprice Stock Options. (incorporated by reference to Exhibit 10.3.4A to the Annual Report on Form 10-K for the year ended December 31, 1996). 10.4. Amended and Restated 1994 Stock Option and Long-Term Incentive Plan. (incorporated by reference to Exhibit A to the 1997 Annual Meeting Proxy Statement). 10.4.1 Non-Employee Directors' Stock Option Plan. (incorporated by reference to Appendix A to the 1996 Annual Meeting Proxy Statement). 10.4.2 Capital Accumulation Plan for Key Employees of Jefferies Group, Inc. (incorporated by reference to Exhibit 10.3.7 to Registration Statement). 10.4.3 Form of Stock Option Agreement between the Company and certain employees of the Company (incorporated by reference to Exhibit 10.3.3 to Registration Statement). 10.4.4 Pay-For-Performance Incentive Plan (incorporated by reference to Exhibit B to the 1997 Annual Meeting Proxy Statement). 10.4.5 Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.3.1A to the Annual Report on Form 10-K for the year ended December 31, 1997) 10.4.6* 1998 Amended and Restated Stock Unit Award Program
57
SEQUENTIALLY EXHIBITS NUMBERED NUMBER DESCRIPTION PAGE - --------- ------------------------------------------------------------------------------------------ ------------- 10.5. Lease, dated July 11, 1990, between AEW/LBA Acquisition Co. LLC (as successor to 400 Corporate Pointe, Ltd.) and Integrated Analytics Corporation, as assigned by Integrated Analytics Corporation to the Company (incorporated by reference to Exhibit 10.3.3 to Registration Statement). 10.5.1 First Amendment to Lease, dated as of June 1, 1995, between AEW/LBA Acquisition Co. LLC (as successor to 400 Corporate Pointe, Ltd.) and the Company(incorporated by reference to Exhibit 10.5.7 to Annual Report of Form 10-K for the year ended December 31, 1996). 10.5.2 Second Amendment to Lease, dated as of December 5, 1996, between Arden Realty Limited Partnership and the Company. (incorporated by reference to Exhibit 10.5.2 to the Annual Report on Form 10-K for the year ended December 31, 1997.) 10.5.3 Lease, dated October 4, 1996, between Spartan Madison Corp. and the Company. (incorporated by reference to Exhibit 10.5.3 to the Annual Report on Form 10-K for the year ended December 31, 1997.) 10.5.4 First Supplemental Agreement, dated as of January 29, 1997, between Spartan Madison Corp. and the Company. (incorporated by reference to Exhibit 10.5.4 to the Annual Report on Form 10-K for the year ended December 31, 1997.) 10.5.5 Second Supplemental Agreement, dated as of November 25, 1997, between Spartan Madison Corp. and the Company. (incorporated by reference to Exhibit 10.5.5 to the Annual Report on Form 10-K for the year ended December 31, 1997.) 10.5.6 Lease dated March 10, 1995, between Boston Wharf Co. and the Company. (incorporated by reference to Exhibit 10.5.6 to the Annual Report on Form 10-K for the year ended December 31, 1997.) 10.6 Form of QuantEX Software and Hardware License Agreement (incorporated by reference to Exhibit 10.3.3 to Registration Statement). 21* Subsidiaries of Company. 23* Consent of KPMG LLP. 27* Financial Data Schedule.
- ------------------------ * Filed herewith 58 EX-2.1 2 EX-2.1 Appendix A AGREEMENT AND PLAN OF MERGER Agreement and Plan of Merger (this "AGREEMENT"), dated as of the 17th day of March, 1999, by and between JEFFERIES GROUP, INC., a Delaware corporation ("JEFG"), and INVESTMENT TECHNOLOGY GROUP, INC., a Delaware corporation ("ITGI", and, together with JEFG, the "CONSTITUENT CORPORATIONS"). WHEREAS, the Board of Directors of JEFG has approved the business transactions pursuant to which all the assets, businesses and Liabilities (as defined below) of ITGI and its subsidiaries will be separated from all other assets, businesses and Liabilities of JEFG; WHEREAS, JEFG and JEF Holding Company, Inc., a Delaware corporation and wholly-owned subsidiary of JEFG ("HOLDING"), concurrently herewith are entering into a Distribution Agreement (the "DISTRIBUTION AGREEMENT"), which provides that (x) JEFG will transfer to Jefferies & Company, Inc., a Delaware corporation and wholly-owned subsidiary of JEFG ("JEFCO"), prior to the time that JEFCO becomes a subsidiary of Holding in connection with the Contribution (defined below), and to Holding, and JEFCO and Holding will accept from JEFG, all of JEFG's assets other than JEFG's capital stock in ITGI (collectively, the "CONTRIBUTION"), and JEFG will assign to Holding (or to JEFCO, as appropriate), and Holding and JEFCO (as appropriate) will assume from JEFG, all JEFG liabilities excluding all liabilities of, or related to, ITGI (the "ASSUMPTION") (such transfer and acceptance pursuant to the Contribution and such assignment and assumption pursuant to the Assumption being collectively referred to herein as the "TRANSFERS"), and (y) all of the outstanding common stock of Holding (the "Holding Common Stock") will be distributed in a pro rata dividend (the "DISTRIBUTION") to JEFG's stockholders; WHEREAS, as of March 16, 1999, ITGI declared a dividend in an amount equal to $4.00 per share in cash payable on the business day immediately succeeding the consummation of the pre-closing to the Merger referred to in Sections 2, 8, 9 and 10 hereof (the "PRE-CLOSING") to all its stockholders of record as of April 20, 1999, including JEFG (the "SPECIAL ITGI CASH DIVIDEND"); WHEREAS, following the Special ITGI Cash Dividend, the Transfers, and the Distribution, (x) ITGI will merge (the "MERGER," and together with the Transfers and the Distribution, collectively the "JEFG TRANSACTIONS") with and into JEFG and (y) outstanding shares of Common Stock, par value $0.01 per share (the "ITGI COMMON STOCK"), of ITGI will be canceled or converted into the right to receive shares of Common Stock, par value $0.01 per share (the "JEFG COMMON STOCK"), of JEFG in the manner set forth herein; WHEREAS, JEFG, Holding and ITGI concurrently herewith are entering into a Tax Sharing and Indemnification Agreement (the "TAX AGREEMENT"), which sets forth the rights and obligations of JEFG and Holding following the Merger with respect to certain tax matters, and JEFG and Holding concurrently herewith are entering into a Benefits Agreement (the "BENEFITS AGREEMENT," and together with the Distribution Agreement and the Tax Agreement, the "ANCILLARY AGREEMENTS"), which sets forth the rights and obligations of JEFG and Holding following the Merger with respect to certain employee benefit matters; WHEREAS, the Boards of Directors of JEFG and ITGI have each determined that the combination of JEFG and ITGI into one publicly traded corporation after the Transfers and the Distribution is in the best interest of JEFG and ITGI and have each approved this Merger Agreement and the Merger upon the terms and conditions set forth herein; WHEREAS, for federal income tax purposes, it is intended that the Merger qualify as a tax-free liquidation of ITGI into JEFG under Section 332 of the Internal Revenue Code of 1986, as amended A-1 (the "CODE"), and a reorganization for ITGI's stockholders, excluding JEFG (the "ITGI PUBLIC STOCKHOLDERS") under Section 368(a)(1)(A) of the Code; NOW THEREFORE, in consideration of the agreements and conditions set forth below, the parties hereto, intending to be legally bound, hereby agree as follows: 1. THE MERGER Subject to the terms and conditions hereof and in accordance with the General Corporation Law of the State of Delaware, as amended (the "DGCL"), at the Effective Time (as hereinafter defined): (a) ITGI shall be merged with and into JEFG and the separate existence of ITGI shall cease; (b) JEFG, as the surviving corporation in the Merger (the "SURVIVING CORPORATION"), (i) shall continue its corporate existence under the laws of the State of Delaware, (ii) shall change its name to "INVESTMENT TECHNOLOGY GROUP, INC.", and (iii) shall succeed to all rights, assets, liabilities and obligations of ITGI in accordance with the DGCL; (c) the Certificate of Incorporation of JEFG, as in effect immediately prior to the Effective Time, shall continue as the Certificate of Incorporation of the Surviving Corporation, as amended and restated as set forth on Appendix A hereto (with the amendments referred to therein being referred to herein as the "CHARTER AMENDMENT"); (d) the By-laws of JEFG, as in effect immediately prior to the Effective Time, shall continue as the By-laws of the Surviving Corporation, as amended and restated as set forth on Appendix B hereto; (e) the directors of ITGI immediately prior to the Effective Time shall be the directors of the Surviving Corporation; and (f) the officers of ITGI immediately prior to the Effective Time shall continue as the officers of the Surviving Corporation. From and after the Effective Time, the Merger will have all the effects provided by applicable law. 2. STOCKHOLDERS' MEETINGS; PRE-CLOSING, CLOSING AND EFFECTIVE TIME OF THE MERGER; SEC FILINGS (a) Prior to the date hereof, JEFG and Holding have jointly prepared and filed with the Securities and Exchange Commission (the "SEC") under the Securities Exchange Act of 1934, as amended and the rules and regulations thereunder (the "EXCHANGE ACT"), a proxy statement/information statement (as amended from time to time, the "PROXY/INFORMATION STATEMENT") and JEFG and ITGI have jointly prepared and filed with the SEC a proxy statement/prospectus (as amended from time to time, the "PROXY/PROSPECTUS"). The Proxy/Information Statement comprises and will comprise (i) proxy material of JEFG with respect to the approval and adoption of this Agreement (including the Charter Amendment) and the issuance of JEFG Common Stock pursuant to this Agreement and the approval of certain employee benefit plans of Holding (the "PLAN PROPOSALS") and (ii) an information statement with respect to the Distribution and Holding, which will be filed with the SEC as part of a Form 10 registration statement of Holding under the Exchange Act. The Proxy/Prospectus comprises and will comprise proxy material of ITGI with respect to the approval and adoption of this Agreement, the election of ITGI directors and the ratification of ITGI's auditor appointment and a registration statement (as amended from time to time, the "REGISTRATION STATEMENT"), including a prospectus, of JEFG under the Securities Act of 1933, as amended and the rules and regulations thereunder (the "SECURITIES ACT"), with respect to JEFG Common Stock to be issued to the ITGI Public Stockholders pursuant to this Agreement in connection with the Merger. JEFG will use its best efforts to respond to any comments of the SEC and take such other actions as may be necessary or appropriate with respect to the Proxy/Information Statement to enable the Proxy/Information Statement in definitive form to be mailed to JEFG's stockholders as promptly as practicable. Each of JEFG and ITGI will use their respective best efforts to respond to any comments of the SEC and take such other actions as may be necessary or appropriate to enable the SEC to declare the Registration Statement effective under the Securities Act and to cause a Proxy/Prospectus in definitive form to be mailed to ITGI's stockholders as promptly as practicable. A-2 (b) JEFG shall submit this Agreement and the issuance of JEFG Common Stock pursuant to this Agreement and the Plan Proposals to the holders of JEFG Common Stock and ITGI shall submit this Agreement, the election of ITGI directors and the ratification of ITGI's auditor appointment and to the holders of ITGI Common Stock, respectively, for approval and adoption at stockholders' meetings to be held April 20, 1999 (the "STOCKHOLDERS' MEETINGS"). (c) Subject to the satisfaction of the conditions contained in Sections 8, 9 and 10 hereof, the Pre-Closing shall occur on the day of the Stockholders' Meetings, unless extended in writing by JEFG and ITGI (the "PRE-CLOSING DATE"). Immediately following completion of the Pre-Closing, JEFG, ITGI, Holding and The Bank of New York, as escrow agent (the "ESCROW AGENT"), shall enter into a pre-closing and escrow agreement dated as of the Pre-Closing Date, substantially in the form of Appendix C hereto (the "ESCROW AGREEMENT"), pursuant to which: (1) ITGI shall deposit into escrow, cash in an amount equal to the aggregate Special ITGI Cash Dividend, to be released without condition or limitation by the Escrow Agent on the business day following the completion of the Pre-Closing to all of ITGI's stockholders of record as of the close of business on the date of the Stockholders' Meetings; (2) Documents shall be executed and placed into escrow to effectuate, in accordance with the Distribution Agreement, any remaining Transfers immediately following the Escrow Agent's payment to JEFCO of $60 million, consistent with the direction of JEFG delivered on the Pre-Closing Date instructing the Escrow Agent to make such payment to JEFCO in respect of JEFG's pro rata share of the Special ITGI Cash Dividend, which remaining Transfers will be effected through the Escrow Agent in accordance with the Escrow Agreement immediately following payment of the Special ITGI Cash Dividend; (3) JEFG shall deposit into escrow an agreement between JEFG and EquiServe, as distribution agent for the Holding Common Stock (the "DISTRIBUTION AGENT"), pursuant to which JEFG shall irrevocably direct the Distribution Agent to, and the Distribution Agent shall agree to, distribute all Holding Common Stock to JEFG's stockholders immediately after being instructed to do so by the Escrow Agent, who shall issue such instructions unless the Escrow Agent receives a certificate from ITGI or JEFG on or prior to 9:00 a.m. E.T. on the Closing Date that either or both of the conditions referred to in Section 11(b) or (c) shall not have been satisfied; and (4) ITGI and JEFG shall deposit into escrow the executed Certificate of Merger (as defined below), to be filed without condition or limitation by the Escrow Agent with the Secretary of State of the State of Delaware after the Escrow Agent's (i) issuance of the instructions to the Distribution Agent described in clause (3) above and (ii) receipt of confirmation from the Distribution Agent confirming in writing its book-entry distribution of all Holding Common Stock to JEFG's stockholders. Subject to completion of the Pre-Closing and upon the satisfaction of the conditions contained in Section 11(b) and (c) herein, the Constituent Corporations shall hold a closing (the "CLOSING") at the offices of Morgan, Lewis & Bockius LLP, New York, New York on the fifth business day following the date of the Stockholders' Meetings unless extended in writing by JEFG and ITGI (the "CLOSING DATE"). On the Closing Date, the Escrow Agent, on behalf of the Constituent Corporations, shall cause the Merger to be consummated by filing a certificate of merger (the "CERTIFICATE OF MERGER") with the Secretary of State of the State of Delaware in accordance with clause (4) above and the provisions of the Escrow Agreement (the date and time of such filing, or such later date or time agreed upon by JEFG and ITGI in accordance with the DGCL and set forth therein, the "EFFECTIVE TIME"). A-3 3. CONVERSION AND CANCELLATION OF SECURITIES (a) At the Effective Time, each share of ITGI Common Stock issued and outstanding immediately prior to the Effective Time (other than shares of ITGI Common Stock described in Section (b) of this Section) shall, by virtue of the Merger and without any action on the part of the holder thereof, be converted into the right to receive such number of shares of JEFG Common Stock equal to the result obtained by dividing (x) the total number of shares of JEFG Common Stock outstanding immediately prior to the Effective Time by (y) the total number of shares of ITGI Common Stock held by JEFG immediately prior to the Effective Time (the "EXCHANGE RATIO"); provided that no fractional shares of JEFG Common Stock shall be issued and, in lieu thereof, a cash payment shall be made as provided in Section 4(i) herein. (b) At the Effective Time, each share of ITGI Common Stock held in the treasury of ITGI or held by JEFG immediately prior to the Effective Time, shall by virtue of the Merger and without any action on the part of the holder thereof, be automatically canceled and retired and cease to exist, and no cash, securities or other property shall be payable in respect thereof. (c) The holders of shares of ITGI Common Stock or JEFG Common Stock shall not be entitled to appraisal rights as a result of either of the Transfers or the Merger. 4. EXCHANGE OF CERTIFICATES (a) Prior to the Pre-Closing Date, JEFG shall select a bank or trust company to act as exchange agent (the "EXCHANGE AGENT") in connection with the surrender of certificates evidencing shares of ITGI Common Stock converted into shares of JEFG Common Stock pursuant to the Merger. On the Pre-Closing Date, JEFG shall deposit with the Escrow Agent one or more certificates representing the shares of JEFG Common Stock issuable pursuant to Section 3(a) (the "MERGER STOCK"), which shares of Merger Stock shall be issued in accordance with this Agreement at the Effective Time. At and following the Effective Time, JEFG shall deliver to the Exchange Agent such cash as may be required from time to time to make payment of cash in lieu of fractional shares in accordance with Section 4(i) hereof. (b) As soon as practicable after the Effective Time, JEFG shall cause the Exchange Agent to mail to each person who was, at the Effective Time, a holder of record of a certificate or certificates that immediately prior to the Effective Time evidenced outstanding shares of ITGI Common Stock (the "CERTIFICATES") (i) a letter of transmittal specifying that delivery shall be effected, and risk of loss and title to the Certificates shall pass, only upon delivery of the Certificates to the Exchange Agent, which shall be in a form and contain any other provisions as JEFG and the Surviving Corporation may reasonably agree and (ii) instructions for use in effecting the surrender of the Certificates in exchange for certificates representing the Merger Stock. Upon the proper surrender of Certificates to the Exchange Agent, together with a properly completed and duly executed letter of transmittal and such other documents as may be required by the Exchange Agent, the holder of such Certificate shall be entitled to receive in exchange therefor certificates representing the shares of Merger Stock that such holder has the right to receive pursuant to the terms hereof (together with any dividend or distribution with respect thereto made after the Effective Time and any cash paid in lieu of fractional shares pursuant to Section 4(i)), and the Certificate so surrendered shall be canceled. In the event of a transfer of ownership of ITGI Common Stock that is not registered in the transfer records of ITGI, a certificate representing the proper number of shares of Merger Stock may be issued to a transferee if the Certificate representing such ITGI Common Stock is presented to the Exchange Agent, accompanied by all documents required to evidence and effect such transfer and by evidence reasonably satisfactory to JEFG that any applicable stock transfer tax has been paid. (c) After the Effective Time, each outstanding Certificate which theretofore represented shares of ITGI Common Stock shall, until surrendered for exchange in accordance with this Section 4, be A-4 deemed for all purposes to evidence ownership of full shares of JEFG Common Stock into which the shares of ITGI Common Stock (which, prior to the Effective Time, were represented thereby) shall have been so converted. (d) Any Merger Stock deposited with the Exchange Agent pursuant to Section 4(a) hereof, and not exchanged pursuant to Section 4(b) hereof for ITGI Common Stock within six months after the Effective Time, and any cash deposited with the Exchange Agent pursuant to Section 4(a) hereof, and not exchanged for fractional interests pursuant to Section 4(i) hereof within six months after the Effective Time, shall be returned by the Exchange Agent to the Surviving Corporation which shall thereafter act as exchange agent subject to the rights of holders of ITGI Common Stock hereunder. (e) At the Effective Time, the stock transfer books of ITGI shall be closed and no transfer of shares of ITGI Common Stock shall thereafter be made. (f) None of JEFG, ITGI, the Surviving Corporation or the Exchange Agent will be liable to any holder of shares of ITGI Common Stock for any shares of Merger Stock, dividends or distributions with respect thereto or cash payable in lieu of fractional shares pursuant to Section 4(i) hereof delivered to a state abandoned property administrator or other public official pursuant to any applicable abandoned property, escheat or similar law. (g) If any Certificates shall have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming such Certificates to be lost, stolen or destroyed, the Exchange Agent will deliver in exchange for such lost, stolen or destroyed Certificates the Merger Stock for the shares represented thereby, deliverable in respect thereof, as determined in accordance with the terms hereof. When authorizing such payment in exchange for any lost, stolen or destroyed Certificates, the person to whom the Merger Stock is to be issued, as a condition precedent to such delivery, shall give JEFG a bond satisfactory to JEFG against any claim that may be made against JEFG with respect to the Certificates alleged to have been lost, stolen or destroyed. (h) No dividend or other distribution declared or made after the Effective Time with respect to common stock of the Surviving Corporation with a record date after the Effective Time shall be paid to the holder of any unsurrendered Certificate with respect to the shares of Merger Stock issuable upon surrender thereof until the holder of such Certificate shall surrender such Certificate in accordance with Section 4(b). Subject to the effect of applicable law, following surrender of any such Certificate there shall be paid, without interest, to the record holder of certificates representing whole shares of Merger Stock issued in exchange therefor: (i) at the time of such surrender, the amount of dividends or other distributions with a record date after the Effective Time theretofore paid with respect to common stock of the Surviving Corporation; and (ii) the amount of dividends or other distributions with respect to common stock of the Surviving Corporation that are properly payable with respect to such Merger Stock arising out of the fact that the Surviving Corporation shall have established for a dividend or distribution concerning common stock of the Surviving Corporation with (A) a record date subsequent to the Effective Time but prior to surrender of such Certificate for such Merger Stock and (B) a payment date subsequent to the surrender of such Certificate. (i) No certificates or scrip evidencing fractional shares of Merger Stock shall be issued upon the surrender for exchange of Certificates, and such fractional share interests shall not entitle the owner thereof to any rights of a stockholder of JEFG or the Surviving Corporation. In lieu of any such fractional shares, each holder of a Certificate previously evidencing ITGI Common Stock, upon surrender of such Certificate for exchange pursuant to this Section 4, shall be paid an amount in cash (without interest), rounded to the nearest cent, determined by multiplying (a) the closing regular way price for a share of the Surviving Corporation's common stock on the NYSE Composite Transaction Tape on the first business day immediately following the Effective Time, by (b) the fractional interest to which such holder would otherwise be entitled; PROVIDED, HOWEVER, no holder of ITGI Common Stock will receive cash for any fractional share interest in an amount equal to or greater than such closing A-5 regular way price of one full share of the Surviving Corporation's common stock. The Surviving Corporation shall be obligated to fund all amounts required to be paid in accordance with the preceding sentence. The fractional share interests of each holder of a Certificate previously evidencing ITGI Common Stock will be aggregated. 5. OPTIONS (a) Prior to the Effective Time, each outstanding option to purchase or acquire ITGI Common Stock shall have been adjusted for the effects of the Special ITGI Cash Dividend in the following fashion: the exercise price of each such ITGI option will be reduced so that (1) the ratio of the unadjusted exercise price over the volume weighted average regular way market price of the ITGI Common Stock on the trading day that the Special ITGI Cash Dividend is paid (the "PRE-DIVIDEND PRICE") is equal to (2) the ratio of the adjusted exercise price over the greater of (x) the volume weighted average regular way market price of the ITGI Common Stock on the trading day following the trading day that the Special ITGI Cash Dividend is paid or (y) the Pre-Dividend Price minus the per share amount of the Special ITGI Cash Dividend (with the greater of (x) or (y) constituting the "POST-DIVIDEND PRICE"); PROVIDED, HOWEVER, that the adjusted exercise price shall not be higher than the unadjusted exercise price. In the event, and only in the event, there is an adjustment to the exercise price pursuant to the preceding sentence, to compensate for the loss in the intrinsic value of each option (the spread of the market price above the exercise price), the number of shares issuable upon exercise of the options of each holder will be adjusted to such greater number that is equal to the aggregate number of shares issuable pursuant to the unadjusted options multiplied by the ratio of the Pre-Dividend Price divided by the Post-Dividend Price. (b) Following the adjustments set forth in paragraph (a) of this Section 5, at the Effective Time, each option granted by ITGI to purchase shares of ITGI Common Stock, which is outstanding and unexercised immediately prior thereto, shall be assumed by the Surviving Corporation and converted into an option to purchase such number of shares of the Surviving Corporation's Common Stock and at such exercise price as are determined as provided below (and otherwise having the same vesting, duration and other terms as the original option): (i) the number of shares of the Surviving Corporation's Common Stock to be subject to the new option shall be equal to the product of (1) the number of shares of ITGI Common Stock subject to the original option and (2) the Exchange Ratio, the product being rounded, if necessary, up or down, to the nearest whole share; and (ii) the exercise price per share of the Surviving Corporation's Common Stock under the new option shall be equal to (1) the exercise price per share of the ITGI Common Stock under the original option divided by (2) the Exchange Ratio, rounded, if necessary, up or down, to the nearest cent. The adjustments provided herein with respect to any options which are "incentive stock options" (as defined in Section 422 of the Code) shall be effected in a manner consistent with Section 424(a) of the Code. Prior to the Effective Time, the Board of Directors of ITGI shall take such action as may be required under the governing option plans and agreements to effectuate the foregoing. At the Effective Time, the Surviving Corporation will assume the ITGI 1994 Stock Option and Long-Term Incentive Plan (as amended and restated January 29, 1997), the ITGI Employee Stock Purchase Plan and the ITGI Non-Employee Directors' Stock Option Plan as the successor to ITGI under such plans. Awards authorized under such plans may be made to employees of the Surviving Corporation and its subsidiaries following the Effective Time. A-6 6. REPRESENTATIONS AND WARRANTIES 6A. REPRESENTATIONS AND WARRANTIES OF JEFG. JEFG represents and warrants to, and agrees with, ITGI as follows: (a) Organization, Etc. JEFG is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite power and authority to own, lease and operate its properties and to carry on its business as is now being conducted as described in the JEFG SEC Reports (defined below). Except as set forth on Section 6A(a) of the disclosure schedule attached to this Agreement (the "DISCLOSURE SCHEDULE"), JEFG is duly qualified as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of its properties owned or leased or the nature of its activities makes such qualification necessary, except where such failure to so qualify would not have any material adverse effect on JEFG and its subsidiaries taken as a whole (a "JEFG MATERIAL ADVERSE EFFECT"). JEFG has provided to ITGI complete and correct copies of its certificate of incorporation and bylaws (the "ORGANIZATIONAL DOCUMENTS"), as currently in effect. (b) Authority of JEFG. JEFG has full corporate power and authority to (i) execute, deliver and perform its obligations under this Agreement and the Ancillary Agreements and (ii) to consummate the JEFG Transactions. The execution, delivery and performance of this Agreement and the Ancillary Agreements and the consummation of the JEFG Transactions have been duly and validly authorized by the Board of Directors of JEFG, and no other corporate proceedings on the part of JEFG are necessary to authorize this Agreement or any of the Ancillary Agreements or to consummate the JEFG Transactions, other than the approval of the adoption by the JEFG stockholders of this Agreement and the issuance of JEFG Common Stock pursuant to this Agreement. Each of this Agreement and the Ancillary Agreements has been duly and validly executed and delivered by JEFG and constitutes valid and binding agreements of JEFG, enforceable against JEFG in accordance with their respective terms. (c) No Consent. No filing or registration with, or permit, authorization, consent or approval of, or notification or disclosure (collectively, "GOVERNMENTAL CONSENTS") to, any United States (federal, state or local) or foreign government, or governmental, regulatory or administrative authority, agency or commission, court or other body or any arbitral tribunal (each, a "GOVERNMENTAL AUTHORITY") or any other third party (collectively, "CONSENTS") is required in connection with the execution, delivery and performance by JEFG of this Agreement or any of the Ancillary Agreements or the consummation by JEFG of the JEFG Transactions, except (i) the filing and effectiveness of the Proxy/Information Statement under the Exchange Act, the filing of the Proxy/Prospectus under the Exchange Act and the Securities Act and the effectiveness of the Proxy/Prospectus under the Securities Act, (ii) the applicable approval of this Agreement (including the Charter Amendment) and the issuance of JEFG Common Stock pursuant to this Agreement by the holders of JEFG Common Stock, (iii) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware, (iv) such consents, approvals, orders, permits, authorizations, registrations, declarations and filings as may be required under the Blue Sky laws of various states, (v) the listing on the New York Stock Exchange of the common stock of the Surviving Corporation, in connection with the Merger, and of Holding, in connection with the Distribution, and (vi) as set forth in Section 6A(c) of the Disclosure Schedule. (d) No Violation. Assuming that all Consents have been duly made or obtained as contemplated by Section 6A(c), the execution, delivery and performance by JEFG of this Agreement and the Ancillary Agreements and the consummation by JEFG of the JEFG Transactions will not (i) violate any provision of the Organizational Documents of JEFG, (ii) to the best of JEFG's knowledge, violate any statute, rule, regulation, order or decree of any Governmental Authority by which JEFG or any of its subsidiaries other than ITGI and its subsidiaries (the "NON-ITGI SUBSIDIARIES"), or their respective assets, may be bound or affected or (iii) result in a material violation or breach of, or constitute a material default (or give rise to any right of termination, cancellation, acceleration, redemption or repurchase) under, any of the terms, conditions or provisions of (x) any note, bond, mortgage, A-7 indenture or deed of trust relating to indebtedness for borrowed money or (y) any material license, lease or other agreement, instrument or obligation to which JEFG or any of the Non-ITGI Subsidiaries is a party or by which any of their respective assets may be bound or affected. (e) Capitalization of JEFG. The authorized capital stock of JEFG consists of 100,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock, $.01 par value per share ("JEFG PREFERRED STOCK"). As of December 31, 1998, there were 21,230,030 JEFG Common Stock and no shares of JEFG Preferred Stock outstanding. All issued and outstanding shares of capital stock of JEFG are duly authorized and validly issued, fully paid, nonassessable and free of preemptive rights with respect thereto. As of the date hereof, 695,499 shares of JEFG Common Stock are issuable upon exercise of outstanding options or other rights to purchase or acquire JEFG Common Stock ("JEFG COMMON STOCK EQUIVALENTS") and 301,682 shares of JEFG Common Stock are reserved under employee stock ownership, stock purchase, equity compensation and incentive plans of JEFG and the Non-ITGI Subsidiaries. Prior to the Effective Time, JEFG will use its best efforts to cause all JEFG Common Stock that is the subject of JEFG Common Stock Equivalents to be issued and all JEFG Common Stock Equivalents to be exercised or canceled or exchanged for options, shares, awards or common stock equivalents of Holding. Except for the JEFG Common Stock Equivalents, there are no options, warrants, calls, subscriptions, or other rights, agreements or commitments obligating JEFG to issue, transfer or sell any shares of capital stock of JEFG or any other securities convertible into or evidencing the right to subscribe for any such shares. (f) SEC Filings. (i) JEFG has timely filed with the SEC all required forms, reports, registration statements and documents required to be filed by it with the SEC since January 1, 1999 (collectively, the "JEFG SEC REPORTS"), all of which complied as to form in all material respects with the applicable provisions of the Securities Act or the Exchange Act, as the case may be. The JEFG SEC Reports (including all exhibits and schedules thereto and documents incorporated by reference therein) did not, as of their respective dates, and do not contain any untrue statement of a material fact concerning JEFG and the Non-ITGI Subsidiaries or omit to state a material fact required to be stated therein concerning JEFG and the Non-ITGI Subsidiaries or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading concerning JEFG and the Non-ITGI Subsidiaries. (ii) JEFG will deliver to ITGI as soon as they become available true and complete copies of any report or other document mailed by JEFG to its securityholders generally or filed by it with the SEC, in each case subsequent to the date hereof and prior to the Effective Time (the "SUBSEQUENT JEFG REPORTS"). As of their respective dates, the Subsequent JEFG Reports will not contain any untrue statement of a material fact concerning JEFG and the Non-ITGI Subsidiaries or omit to state a material fact required to be stated therein concerning JEFG and the Non-ITGI Subsidiaries or necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading concerning JEFG and the Non-ITGI Subsidiaries and will comply in all material respects with all applicable requirements of law. The audited consolidated financial statements and unaudited consolidated interim financial statements of JEFG and the Non-ITGI Subsidiaries included or incorporated by reference in the JEFG SEC Reports or to be included or incorporated by reference in the Subsequent JEFG Reports have been prepared or will be prepared, as the case may be, in accordance with GAAP and fairly present or will fairly present the consolidated financial position of JEFG and the Non-ITGI Subsidiaries, as of the dates thereof and the consolidated results of operations and consolidated cash flow for the periods to which they relate (subject, in the case of any unaudited interim financial statements, to normal year-end adjustments and to the extent they may not include footnotes or may be condensed or summary statements). A-8 (g) Liabilities. To the best knowledge of JEFG, JEFG has no Liabilities (as defined herein) other than (i) those arising under this Agreement or described in Section 6A(g)(i) of the Disclosure Schedule, and (ii) any Liabilities of or related to ITGI and its subsidiaries. For purposes hereof, the term "LIABILITIES" means any and all known claims, debts, commitments, liabilities and obligations, absolute or contingent, matured or not matured, liquidated or unliquidated, accrued or unaccrued, whenever arising, including all costs and expenses relating thereto, and including, without limitation, those debts, commitments, liabilities and obligations arising under this Agreement, any law, rule, regulation, action, order or consent decree of any governmental entity or any award of any arbitrator of any kind, and those arising under any contract, commitment or undertaking. Immediately following the Transfers, JEFG will have no Liabilities other than those described in clause (ii) above and those set forth in Section 6A(g)(ii) of the Disclosure Schedule. (h) No JEFG Assets Used in ITGI Business. No "ASSETS" (as defined below) of JEFG or any of its subsidiaries (other than ITGI and its subsidiaries) are used by ITGI or any of its subsidiaries or reflected on the consolidated balance sheet of ITGI. For purposes hereof, the term "ASSETS" means properties, rights, contracts, leases and claims, of every kind and description, wherever located, whether tangible or intangible, and whether real, personal or mixed. (i) Absence of Changes or Events. Since December 31, 1998, JEFG has not, directly or indirectly, except as described in Section 6A(i) of the Disclosure Schedule: (i) except in the ordinary course of business, purchased or otherwise acquired, or agreed to purchase or otherwise acquire, any share of capital stock of JEFG, or any options, warrants or other equity security, debt security or other indebtedness of JEFG or declared, set aside or paid any dividend or otherwise made a distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock; (ii) except in the ordinary course of business (A) created or incurred any indebtedness for borrowed money; (B) assumed, guaranteed, endorsed or otherwise become responsible for the obligations of any other individual, firm or corporation, or made any loans or advances to any other individual, firm or corporation; or (C) entered into any commitment or incurred any Liabilities; (iii) except in the ordinary course of business, suffered any damage, destruction or loss that is material to JEFG, whether covered by insurance or not; or (iv) agreed to do any of the things described in the preceding clauses (i) through (iii). (j) Litigation. Except as described in Section 6A(j) of the Disclosure Schedule, there is no (1) claim, action, suit or proceeding pending or, to the best of JEFG's knowledge, threatened against JEFG or any of the Non-ITGI Subsidiaries by or before any Governmental Authority or (2) outstanding judgment, order, writ, injunction or decree of any court, governmental agency or arbitration tribunal in a proceeding to which JEFG was or is a party or by which any of them or any of their respective assets may be bound or affected. (k) Compliance with Laws. (i) Except as described in Section 6A(k)(i) of the Disclosure Schedule, neither JEFG nor any of the Non-ITGI Subsidiaries has violated or failed to comply with any statute, law, ordinance, regulation, rule or order of any Governmental Authority, or any judgment, decree or order of any court, applicable to its business or operations, except where such violation or failure to comply would not give rise to a JEFG Material Adverse Effect. (ii) Except as described in Section 6A(k)(ii) of the Disclosure Schedule, (1) JEFG has such certificates, permits, licenses, franchises, consents, approvals, orders, authorizations and clearances from appropriate governmental agencies and bodies as are necessary to own, lease A-9 or operate the properties and to conduct the business of Non-ITGI Subsidiaries in the manner described in the JEFG SEC Reports ("JEFG LICENSES"), except where the failure to have such will not give rise to a JEFG Material Adverse Effect; (2) JEFG is, and within the period of all applicable statutes of limitation has been, in compliance with its obligations under such JEFG Licenses and no event has occurred that allows, or after notice or lapse of time would allow, revocation or termination of such JEFG Licenses and (3) JEFG has no knowledge of any facts or circumstances that could reasonably be expected to result in an inability of JEFG to renew any JEFG License. Neither the execution and delivery by JEFG of this Agreement nor the Ancillary Agreements nor the consummation of the JEFG Transactions will result in any revocation or termination of any JEFG License. Set forth in Section 6A(k)(ii) of the Disclosure Schedule is a true and complete list of all JEFG Licenses which are necessary for the conduct of the business described in clause (1) above. (l) Labor and Employment Matters. Except as described in Section 6A(l) of the Disclosure Schedule: (i) Neither JEFG nor any of the Non-ITGI Subsidiaries is party to any union contract or other collective bargaining agreement. JEFG and the Non-ITGI Subsidiaries are in compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment, safety, wages and hours, except where the failure to comply will not give rise to a JEFG Material Adverse Effect, and are not engaged in any unfair labor practice. There is no labor strike, slowdown or stoppage pending (or any labor strike or stoppage threatened) against or affecting JEFG or any of the Non-ITGI Subsidiaries, and no union organizing activities with respect to any of its employees are occurring or threatened. (ii) Neither JEFG nor any of the Non-ITGI Subsidiaries is a party to any employment, management services, consultation or other contract or agreement with any past or present officer, director or employee or any entity affiliated with any past or present officer, director or employee, other than the agreements executed by employees generally, the forms of which have been provided to ITGI. (m) No Puts. Except as set forth in Section 6(A)(m) of the Disclosure Schedule, neither the execution and delivery by JEFG of this Agreement or the Ancillary Agreements nor the consummation of the JEFG Transactions gives rise to any obligation of JEFG or any of the Non-ITGI Subsidiaries, or any right of any holder of any security of JEFG or any of the Non-ITGI Subsidiaries to require JEFG to purchase, offer to purchase, redeem or otherwise prepay or repay any such security, or deposit any funds to effect the same. (n) Leases. There have been made available to ITGI true and complete copies of each lease pursuant to which real property is held under lease by JEFG, or, to JEFG's knowledge, under a lease to which JEFG is guarantor, and true and complete copies of each lease pursuant to which JEFG leases real property to others. Section 6A(n) of the Disclosure Schedule sets forth a true and complete list of all such leases. Such leased real properties are in good operating order and condition. (o) Contracts and Commitments. Section 6A(o) of the Disclosure Schedule sets forth each existing contract, obligation, commitment, agreement or understanding of any type in any of the following categories: (i) contracts that provide for payments by JEFG in any year aggregating in excess of $100,000; (ii) any contract under which JEFG has become absolutely or contingently or otherwise liable for (1) the performance under a contract of any other person, firm or corporation or A-10 (2) the whole or any part of the indebtedness or liabilities of any other person, firm or corporation; (iii) any contract under which any amount payable by JEFG is dependent upon the revenues or profits of JEFG or its subsidiaries; (iv) any contract with any director, officer or five percent or greater stockholder of JEFG or any contract with any entity in which, to the best of JEFG's knowledge, any director, officer or stockholder or any family member of any director, officer or stockholder has a material economic interest; and (v) any contract that limits or restricts where JEFG may conduct its business or the type or line of business that JEFG may engage in. JEFG is not in breach of or default under any such contract, obligation, commitment, agreement or understanding. (p) Environmental Matters. To the best knowledge of JEFG, without any special inquiry, (i) JEFG and the Non-ITGI Subsidiaries are, and within applicable statutes of limitation, have been, in material compliance with all applicable Environmental Laws (as defined below), (ii) JEFG and the Non-ITGI Subsidiaries have all material permits, authorizations and approvals required under any applicable Environmental Laws and are in compliance with their requirements, and the consummation by JEFG of the transactions contemplated hereby will not require any notification, disclosure, registration, reporting, filing, investigation, or remediation under any Environmental Law, (iii) there are no pending or threatened Environmental Claims (as defined below) against JEFG or any of the Non-ITGI Subsidiaries, (iv) JEFG has no knowledge of any circumstances that could reasonably be anticipated to form the basis of an Environmental Claim against JEFG or any of the Non-ITGI Subsidiaries or any of their respective properties or operations and the business operations relating thereto and (v) there has been no disposal, spill, discharge or release of any hazardous or toxic substance or material, as defined or regulated by any Environmental Law, on, at or under any property that could reasonably be expected to result in material liability of, or material costs to, JEFG under any Environmental Law. For purposes of this Agreement, the following terms shall have the following meanings: "ENVIRONMENTAL LAW" means any foreign, federal, state, local or municipal statute, law, rule, regulation, ordinance, code and any published judicial or administrative interpretation thereof including, without limitation, any judicial or administrative order, consent, decree or judgment relating to, regulating or imposing liability or standards of conduct concerning the environment, health, pollution or any pollutant, contaminant or hazardous or toxic substance or waste, and any other chemical or material exposure to which is prohibited or limited or which is otherwise regulated by any governmental authority. "ENVIRONMENTAL CLAIMS" means any and all civil or criminal administrative, regulatory or judicial actions, suits, demands, notice or demand letters, potentially responsible party letters, claims, liens, notices of noncompliance or violation, investigations or proceedings relating in any way to any Environmental Law. (q) Finders or Brokers. Other than J.P. Morgan & Co. Incorporated, neither JEFG nor any of the Non-ITGI Subsidiaries has employed any investment banker broker, finder or intermediary in connection with the transactions contemplated hereby who might be entitled to any fee, discount or commission. (r) Fairness Opinion. JEFG has received the opinion of J.P. Morgan Securities Inc. attached as Appendix E hereto. (s) Board Recommendation. The Board of Directors of JEFG has, by a unanimous vote at a meeting of such Board duly held on March 17, 1999, approved and adopted, and declared advisable, this Agreement (including the issuance of JEFG Common Stock pursuant to this A-11 Agreement and the Charter Amendment), the Ancillary Agreements, the JEFG Transactions and the Plan Proposals and determined that the JEFG Transactions are in the best interest of the stockholders of JEFG, and prior to the date hereof has resolved to recommend that the holders of JEFG Common Stock approve and adopt this Agreement (including the issuance of JEFG Common Stock pursuant to this Agreement and the Charter Amendment) and the Plan Proposals. (t) Holding Debt Assumption. Supplemental indentures have been duly executed in respect of JEFG's 7 1/2% Senior Notes Due 2007 (the "7 1/2% NOTES") which (i) amend in certain respects the indenture relating to the 7 1/2% Notes and (ii) effective as of the date the Transfers are completed, provide that Holding shall assume, and JEFG shall be released from, JEFG's obligations under the 7 1/2% Notes and the related indenture. Complete copies of such supplemental indentures, along with the officers' certificates, opinions of JEFG's counsel and consents of holders of the 7 1/2% Notes provided to the trustee for the 7 1/2% Notes in connection therewith have been provided to ITGI and its counsel. 6B. REPRESENTATIONS AND WARRANTIES OF ITGI. ITGI represents and warrants to, and agrees with, JEFG as follows: (a) Organization, Etc. ITGI is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite power and authority to own, lease and operate is properties and to carry on its business as it is now being conducted as described in the ITGI SEC Reports (defined below). Except as set forth on Section 6B(a) of the Disclosure Schedule, ITGI is duly qualified as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of its properties owned or leased or the nature of its activities makes such qualification necessary, except where such failure to so qualify would not have any material adverse effect on ITGI and its subsidiaries taken as a whole (an "ITGI MATERIAL ADVERSE EFFECT"). ITGI has provided to JEFG complete and correct copies of the Organizational Documents, as currently in effect, of ITGI. (b) Authority of ITGI. ITGI has full corporate power and authority to (i) execute, deliver and perform its obligations under this Agreement and (ii) to declare and pay the Special ITGI Cash Dividend and to consummate the Merger. The execution, delivery and performance of this Agreement, the payment of the Special ITGI Cash Dividend (subject to approval and adoption of this Agreement and the Merger by the JEFG and ITGI stockholders and the satisfaction or waiver of all other conditions to the Merger) and the consummation of the Merger have been duly and validly authorized by the Board of Directors of ITGI, and no other corporate proceedings on the part of ITGI are necessary to authorize this Agreement or to consummate the Merger, other than the approval and adoption of this Agreement by ITGI stockholders as required by the DGCL. This Agreement has been duly and validly executed and delivered by ITGI and constitutes a valid and binding agreement of ITGI, enforceable against ITGI in accordance with its terms. (c) No Governmental Consent. No Governmental Consent or other Consent is required in connection with the execution, delivery and performance by ITGI of this Agreement, the declaration and payment of the Special ITGI Cash Dividend or the consummation by ITGI of the Merger, except (i) the filing of the Proxy/Prospectus under the Exchange Act and the Securities Act and the effectiveness thereof under the Securities Act, (ii) the applicable approval of this Agreement and the Merger by the holders of ITGI Common Stock as required by the DGCL, (iii) the filing of the Certificate of Merger with the Secretary of State of the State of Delaware, (iv) such consents, approvals, orders, permits, authorizations, registrations, declarations and filings as may be required under the Blue Sky laws of various states, (v) the listing on the New York Stock Exchange of the common stock of the Surviving Corporation and (vi) as set forth in Section 6B(c) of the Disclosure Schedule. A-12 (d) No Violation. Assuming that all Consents have been duly made or obtained as contemplated by Section 6B(c), the execution, delivery and performance by ITGI of this Agreement and the consummation by ITGI of the Merger and the declaration and payment of the Special ITGI Cash Dividend will not (i) violate any provision of the Organizational Documents of ITGI, (ii) to the best of ITGI's knowledge, violate the DGCL or any other statute, rule, regulation, order or decree of any Governmental Authority by which ITGI or its subsidiaries, or their properties, may be bound or affected or (iii) result in a material violation or breach of, or constitute any material default (or give rise to any right of termination, cancellation, acceleration, redemption or repurchase) under, any of the terms, conditions or provisions of (x) any note, bond, mortgage, indenture or deed of trust relating to indebtedness for borrowed money or (y) any material license, lease or other agreement, instrument or obligation to which ITGI or its subsidiaries is a party. (e) Capitalization of ITGI. (i) The authorized capital stock of ITGI consists of 30,000,000 shares of Common Stock and 5,000,000 shares of Preferred Stock, $.01 par value per share ("ITGI PREFERRED STOCK"). As of December 31, 1998, there were 18,590,360 shares of ITGI Common Stock and no shares of ITGI Preferred Stock outstanding. All issued and outstanding shares of capital stock of ITGI are duly authorized and validly issued, fully paid, nonassessable and free of preemptive rights with respect thereto. (ii) At no time prior to the date hereof did ITGI have more than 18,750,000 shares of ITGI Common Stock issued and outstanding. (iii) As of the date hereof, 2,869,967 shares of ITGI Common Stock are issuable upon exercise of outstanding options or other rights to purchase or acquire ITGI Common Stock ("ITGI COMMON STOCK EQUIVALENTS") and zero shares of ITGI Common Stock are reserved for issuance prior to the Effective Time under employee stock ownership, stock purchase, equity compensation and incentive plans of ITGI and its subsidiaries. Except for the ITGI Common Stock Equivalents, there are no options, warrants, calls, subscriptions, or other rights, agreements or commitments obligating ITGI to issue, transfer or sell any shares of capital stock of ITGI or any other securities convertible into or evidencing the right to subscribe for any such shares. Section 6B(e)(i) of the Disclosure Schedule accurately reflects the total outstanding ITGI Common Stock Equivalents that, at the date hereof or any time prior to or through the Effective Time, could be exercised for ITGI Common Stock by contract, arrangement or otherwise (the "EXERCISABLE ITGI RIGHTS") and Section 6B(e)(ii) of the Disclosure Schedule accurately reflects the total outstanding ITGI Common Stock Equivalents that are the subject to any agreement that prevents the exercise of Exercisable ITGI Rights and the purchase or acquisition of ITGI Common Stock pursuant to Exercisable ITGI Rights until after the earlier of the Effective Time or April 29, 1999 (the "LOCK-UP AGREEMENTS"). Section 6B(e)(ii) of the Disclosure Schedule sets forth the aggregate number of shares subject to each form of Lock-Up Agreement, and Section 6B(e)(iii) of the Disclosure Schedule contains each form of Lock-Up Agreement. (iv) ITGI agrees to promptly advise JEFG (and provide executed copies of any agreement) concerning any Lock-Up Agreement executed after the date of this Agreement, including any amendment to any Lock-Up Agreement. ITGI will, prior to the earlier of the Effective Date or April 30, 1999, only permit the exercise of such Exercisable ITGI Rights that are not subject to Lock-Up Agreements (regardless of whether such Agreements have been executed on or prior to the date hereof or after the date hereof and prior to the Effective Time). A-13 (f) SEC Filings. (i) ITGI has timely filed with the SEC all required forms, reports, registration statements and documents required to be filed by it with the SEC since January 1, 1999 (collectively, the "ITGI SEC REPORTS"), all of which complied as to form in all material respects with the applicable provisions of the Securities Act or the Exchange Act, as the case may be. As of their respective dates, the ITGI SEC Reports (including all exhibits and schedules thereto and documents incorporated by reference therein) did not, as of their respective dates, and do not contain any untrue statement of a material fact concerning ITGI and its subsidiaries or omit to state a material fact required to be stated therein concerning ITGI and its subsidiaries or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading concerning ITGI and its subsidiaries. (ii) ITGI will deliver to JEFG as soon as they become available true and complete copies of any report or other document mailed by ITGI to its securityholders generally or filed by it with the SEC, in each case subsequent to the date hereof and prior to the Effective Time (the "SUBSEQUENT ITGI REPORTS"). As of their respective dates, the Subsequent ITGI Reports will not contain any untrue statement of a material fact or omit to state a material fact concerning ITGI and its subsidiaries or omit to state a material fact required to be stated therein concerning ITGI and its subsidiaries or necessary to make the statements therein, in the light of the circumstances under which they are made, not misleading concerning ITGI and its subsidiaries and will comply in all material respects with all applicable requirements of law. The audited consolidated financial statements and unaudited consolidated interim financial statements of ITGI and its subsidiaries included or incorporated by reference in the ITGI SEC Reports or to be included or incorporated by reference in the Subsequent ITGI Reports have been prepared or will be prepared in accordance with GAAP and fairly present or will fairly present the consolidated financial position of ITGI and its subsidiaries, as of the dates thereof and the consolidated results of operations and consolidated cash flow for the periods to which they relate (subject, in the case of any unaudited interim financial statements, to normal year-end adjustments and to the extent they may not include footnotes or may be condensed or summary statements). (g) Liabilities. Except for the Liabilities arising under this Agreement or set forth or referred to in ITGI SEC Reports or the Proxy/Prospectus, ITGI and its subsidiaries have no material Liabilities, other than those described in Section 6B(g) of the Disclosure Schedule. (h) Absence of Changes or Events. Since December 31, 1998, ITGI has not, directly or indirectly, except as described in Section 6B(h) of the Disclosure Schedule: (i) except in the ordinary course of business, purchased or otherwise acquired, or agreed to purchase or otherwise acquire, any share of capital stock of ITGI, or any options, warrants or other equity security, debt security or other indebtedness of ITGI or declared, set aside or paid any dividend or otherwise made a distribution (whether in cash, stock or property or any combination thereof) in respect of its capital stock; (ii) except in the ordinary course of business (A) created or incurred any indebtedness for borrowed money; (B) assumed, guaranteed, endorsed or otherwise become responsible for the obligations of any other individual, firm or corporation, or made any loans or advances to any other individual, firm or corporation; or (C) entered into any commitment or incurred any liabilities; (iii) except in the ordinary course of business, suffered any damage, destruction or loss that is material to ITGI, whether covered by insurance or not; or (iv) agreed to do any of the things described in the preceding clauses (i) through (iii). A-14 (i) Compliance with Laws. (i) Except as described in Section 6B(i)(i) of the Disclosure Schedule, neither ITGI nor any of its subsidiaries has violated or failed to comply with any statute, law, ordinance, regulation, rule or order of any Governmental Authority, or any judgment, decree or order of any court, applicable to their respective business or operations, except where such violation or failure to comply would not give rise to an ITGI Material Adverse Effect. (ii) Except as described in Section 6B(i)(ii) of the Disclosure Schedule, (1) ITGI has such certificates, permits, licenses, franchises, consents, approvals, orders, authorizations and clearances from appropriate governmental agencies and bodies as are necessary to own, lease or operate the properties and to conduct the business in the manner described in the ITGI SEC Reports ("ITGI LICENSES"), except where the failure to have such will not give rise to an ITGI Material Adverse Effect; (2) ITGI is, and within the period of all applicable statutes of limitation has been, in compliance with its obligations under such ITGI Licenses and no event has occurred that allows, or after notice or lapse of time would allow, revocation or termination of such ITGI Licenses and (3) ITGI has no knowledge of any facts or circumstances that could reasonably be expected to result in an inability of ITGI to renew any ITGI License. Neither the execution and delivery by ITGI of this Agreement or any Ancillary Agreement or the payment of the Special ITGI Cash Dividend or the consummation of the Merger will result in any revocation or termination of any ITGI License. Set forth in Section 6B(i)(ii) of the Disclosure Schedule is a true and complete list of all ITGI Licenses which are necessary for the conduct of the business described in clause (1) above. (j) Labor and Employment Matters. Except as described in Section 6B(j) of the Disclosure Schedule: (i) Neither ITGI nor any of its subsidiaries is a party to any union contract or other collective bargaining agreement. ITGI and its subsidiaries are in compliance with all applicable laws respecting employment and employment practices, terms and conditions of employment, safety, wages and hours, except where the failure to comply will not give rise to a ITGI Material Adverse Effect, and are not engaged in any unfair labor practice. There is no labor strike, slowdown or stoppage pending (or any labor strike or stoppage threatened) against or affecting ITGI or any of its subsidiaries, and no union organizing activities with respect to any of its employees are occurring or threatened. (ii) Neither ITGI nor any of its subsidiaries is a party to any employment, management services, consultation or other contract or agreement with any past or present officer, director or employee or any entity affiliated with any past or present officer, director or employee, other than the agreements executed by employees generally, the forms of which have been provided to JEFG. (k) No Puts. Except as set forth in Section 6B(k) of the Disclosure Schedule, neither the execution and delivery by ITGI of this Agreement or any Ancillary Agreement nor payment of the Special ITGI Cash Dividend or the consummation of the Merger gives rise to any obligation of ITGI or any of its subsidiaries, or any right of any holder of any security of ITGI or any of its subsidiaries to require ITGI to purchase, offer to purchase, redeem or otherwise prepay or repay any such security, or deposit any funds to effect the same. (l) Leases. There have been made available to JEFG true and complete copies of each lease pursuant to which real property is held under lease by ITGI and under which JEFG is a guarantor, and true and complete copies of each lease pursuant to which ITGI leases real property to others. Section 6B(l) of the Disclosure Schedule sets forth a true and complete list of all such leases. The leased real properties are in good operating order and condition. A-15 (m) Contracts and Commitments. Section 6B(m) of the Disclosure Schedule sets forth each existing contract, obligation, commitment, agreement or understanding of any type in any of the following categories: (i) contracts that provide for payments by ITGI in any year aggregating in excess of $100,000; (ii) any contract under which ITGI has become absolutely or contingently or otherwise liable for (1) the performance under a contract of any other person, firm or corporation or (2) the whole or any part of the indebtedness or liabilities of any other person, firm or corporation; (iii) any contract under which any amount payable by ITGI is dependent upon the revenues or profits of ITGI or its subsidiaries; (iv) any contract with any director, officer or five percent or greater stockholder of ITGI or any contract with any entity in which, to the best of ITGI's knowledge, any director, officer or stockholder or any family member of any director, officer or stockholder has a material economic interest; and (v) any contract that limits or restricts where ITGI may conduct its business or the type or line of business that ITGI may engage in. ITGI is not in breach of or default under any such contract, obligation, commitment, agreement or understanding. (n) Litigation. Except as described in Section 6B(n) of the Disclosure Schedule, there is no (1) claim, action, suit or proceeding pending or, to the best of ITGI's knowledge, threatened against ITGI or any of its subsidiaries by or before any Governmental Authority or (2) outstanding judgment, order, writ, injunction or decree of any court, governmental agency or arbitration tribunal in a proceeding to which ITGI or any of its subsidiaries was or is a party or by which any of them or any of their respective assets may be bound or affected. (o) Environmental Matters. To the best knowledge of ITGI, without any special inquiry, (i) ITGI and its subsidiaries are, and within applicable statutes of limitation, have been, in material compliance with all applicable Environmental Laws, (ii) ITGI and its subsidiaries have all material permits, authorizations and approvals required under any applicable Environmental Laws and are in compliance with their requirements, and the consummation by ITGI of the transactions contemplated hereby will not require any notification, disclosure, registration, reporting, filing, investigation, or remediation under any Environmental Law, (iii) there are no pending or threatened Environmental Claims against ITGI or any of its subsidiaries, (iv) ITGI has no knowledge of any circumstances that could reasonably be anticipated to form the basis of an Environmental Claim against ITGI or any of its subsidiaries or any of their respective properties or operations and the business operations relating thereto and (v) there has been no disposal, spill, discharge or release of any hazardous or toxic substance or material, as defined or regulated by any Environmental Law, on, at or under any property that could reasonably be expected to result in material liability of, or material costs to, ITGI under any Environmental Law. (p) Ownership of JEFG Common Stock. Except as set forth in Section 6B(p) of the Disclosure Schedule, ITGI and its subsidiaries own no JEFG Common Stock and are party to no contracts or options which would allow or obligate ITGI or any of its subsidiaries to purchase JEFG Common Stock. (q) Finders or Brokers. Other than Donaldson, Lufkin & Jenrette Securities Corporation, neither ITGI nor any of its subsidiaries has employed any investment banker broker, finder or A-16 intermediary in connection with the transactions contemplated hereby who might be entitled to any fee, discount or commission. (r) Fairness Opinion. ITGI has received the opinion of Donaldson, Lufkin & Jenrette Securities Corporation attached as Appendix E hereto. (s) Board and Special Committee Recommendations. The Board of Directors of ITGI has, by a unanimous vote at a meeting of such Board duly held on March 16, 1999, approved and adopted, and declared advisable, this Agreement and authorized the declaration and payment of the Special ITGI Cash Dividend and determined that this Agreement and the Merger are in the best interest of the stockholders of ITGI, and prior to the date hereof has resolved to recommend that the holders of ITGI Common Stock approve and adopt this Agreement. In addition, a Special Committee of the Board of Directors of ITGI consisting exclusively of independent directors (the "ITGI SPECIAL COMMITTEE") has, by a unanimous vote at a meeting of such committee held on March 15, 1999, unanimously approved, and declared advisable, this Agreement and determined that this Agreement and the Merger are fair to and in the best interests of ITGI's stockholders other than JEFG. 7. COVENANTS OF JEFG AND ITGI (a) Certain Changes. Except as contemplated by this Agreement and the Ancillary Agreements, ITGI agrees that, without the prior written consent of JEFG, between the date hereof and the Closing Date, ITGI will, and ITGI will cause each of its subsidiaries to (i) conduct its affairs in the ordinary course of business consistent with past and then current practice, (ii) not adopt, amend or modify any employment or personnel contract or plan, or increase the level of compensation payable to any officer or employee other than in accordance with past practice or as otherwise required by law or the terms of any such contract or plan; (iii) refrain from (A) issuing any capital stock or security convertible into capital stock of ITGI, except pursuant to Exercisable ITGI Rights that are not subject to Lock-Up Agreements, (B) granting any option to purchase or acquire ITGI Common Stock, which option is granted outside of the ordinary course or inconsistent with past practice or is exercisable at any time prior to April 30, 1999, and (C) taking any other action that would otherwise alter its capital structure, (iv) refrain from paying any dividend (other than the Special ITGI Cash Dividend) or making any distribution (including, any stock split or stock dividend) with respect to its securities, (v) refrain from entering into any contract or arrangement other than in the ordinary course of business and (vi) refrain from amending its Certificate of Incorporation or By-laws. ITGI agrees to promptly advise JEFG if it has more than 18,750,000 shares of ITGI Common Stock outstanding at any time prior to the Effective Time, or any person holding, or exercising rights under, ITGI Common Stock Equivalents shall have validly tendered any exercise form related thereto and demanded the issuance and delivery of ITGI Common Stock in respect of any such ITGI Common Stock Equivalent prior to the Effective Time. ITGI agrees not to amend, by written instrument, document, waiver or other act or practice, any Lock-Up Agreement without JEFG's prior written consent. Except as contemplated by this Agreement and the Ancillary Agreements, JEFG agrees that, without the prior written consent of ITGI, between the date hereof and the Closing Date, JEFG will, and JEFG will cause each of the Non-ITGI Subsidiaries to (1) conduct its affairs in the ordinary course of business consistent with past and then current practice, (2) not adopt, amend or modify any employment or personnel contract or plan, or increase the level of compensation payable to any officer or employee other than in accordance with past practice or as otherwise required by law or the terms of any such contract or plan; (3) refrain from issuing any capital stock or security convertible into capital stock, except pursuant to outstanding stock options and equity compensation awards, or granting any option or equity compensation awards except any such option or award that by its terms becomes, upon consummation of the Transfers, an option to A-17 purchase or acquire Holding Common Stock or an award in equity of Holding, or taking any other action that would be specified in Section 6A(e) of the Disclosure Schedule, or taking any other action that would otherwise alter its capital structure, (4) refrain from paying any dividend (other than the Distribution) or making any distribution (including, any stock split or stock dividend) with respect to its securities, (5) refrain from entering into any contract or arrangement other than in the ordinary course of business and (6) refrain from amending its Certificate of Incorporation or By-laws. (b) Proxy/Prospectus and Proxy/Information Statement. JEFG agrees that the Proxy/ Prospectus and any amendment or supplement thereto and the Proxy/Information Statement and any amendment or supplement thereto, at the time of mailing thereof and at the time of the Stockholders' Meetings, will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; PROVIDED, HOWEVER, that the foregoing shall not apply to any information relating solely to ITGI and any of its subsidiaries (including financial and statistical information), the Special ITGI Cash Dividend or the ITGI-provided information concerning the Merger, as set forth in detail in Schedule B to the Distribution Agreement (the "ITGI MERGER INFORMATION"). If at any time prior to the Stockholders' Meetings, either the Proxy/Prospectus or the Proxy/Information Statement shall, as it relates solely to JEFG or any of the Non-ITGI Subsidiaries, the Transfers, the Ancillary Agreements, the Distribution or the JEFG Merger Information (defined below), contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, JEFG shall promptly notify ITGI and such parties shall use their best efforts to promptly cause to be filed with the SEC and, as required by law, disseminated to the stockholders of JEFG and ITGI an amendment or supplement that will result in the Proxy/Prospectus and/or the Proxy/Information Statement (as the case may be), as so amended or supplemented, not containing an untrue statement of a material fact and not omitting to state a material fact required to be stated therein or necessary to make the statements therein not misleading; PROVIDED, HOWEVER, that the foregoing shall not apply to any information relating solely to ITGI, any of its subsidiaries, the Special ITGI Cash Dividend and the ITGI Merger Information. JEFG will not file any amendment or supplement to the Proxy/ Prospectus or Proxy/Information Statement, or submit any information to the SEC in connection therewith, without prior consultation with ITGI. ITGI agrees that the Proxy/Prospectus and any amendment or supplement thereto and the Proxy/Information Statement and any amendment or supplement thereto, at the time of mailing thereof and at the time of the Stockholders' Meetings, will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; PROVIDED, HOWEVER, that the foregoing shall not apply to any information relating solely to JEFG and the Non-ITGI Subsidiaries (including financial and statistical information), the Transfers, the Ancillary Agreements, the Distribution or the JEFG-provided information concerning the Merger, as set forth in detail in Schedule A to the Distribution Agreement (the "JEFG MERGER INFORMATION"). If at any time prior to the Stockholders' Meetings, either the Proxy/Prospectus or the Proxy/Information Statement, as it relates solely to ITGI or any of its subsidiaries, the Special ITGI Cash Dividend or the ITGI Merger Information, shall contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, ITGI shall promptly notify JEFG and such parties shall use their best efforts to promptly cause to be filed with the SEC and, as required by law, disseminated to the stockholders of JEFG and ITGI an amendment or supplement that will result in the Proxy/Prospectus and/or the Proxy/Information Statement (as the case may be), as so amended or supplemented, not containing an untrue statement of a material fact and not omitting to state a material fact required to be stated therein or necessary to make the statements therein not misleading; PROVIDED, HOWEVER, that the foregoing shall not apply to A-18 any information relating solely to JEFG and the Non-ITGI Subsidiaries, the Transfers, the Ancillary Agreements, the Distribution or the JEFG Merger Information. ITGI will not file any amendment or supplement to the Proxy/Prospectus or Proxy/Information Statement, or submit any information to the SEC in connection therewith, without prior consultation with JEFG. (c) Further Assurances. In addition to the actions specifically provided for elsewhere in this Agreement, each of the parties hereto will use its commercially reasonable efforts to (i) execute and deliver such further instruments and documents and take such other actions as the other party may reasonably request in order to effectuate the purposes of this Agreement and to carry out the terms hereof and (ii) take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable laws, regulations and agreements or otherwise to consummate and make effective the transactions contemplated by this Agreement, including, without limitation, using its reasonable efforts to obtain any consents and approvals and to make any filings and applications necessary or desirable in order to consummate the transactions contemplated by this Agreement. (d) Expenses. Each of JEFG and ITGI shall be responsible for the Transaction Expenses (as defined below), as set forth in this paragraph (d). To the extent JEFG, Holding or ITGI incurs expenses in connection with the Transactions (as defined below) which do not constitute Transaction Expenses, the party incurring such expense shall be solely responsible for such expenses. "TRANSACTION EXPENSES" shall be limited to reasonable "OUT-OF-POCKET" expenses (i.e., expenses paid to a third party, excluding internal costs or allocations) of JEFG, Holding or ITGI that have been incurred because of or in order to effect the JEFG Transactions and the Special ITGI Cash Dividend (collectively, the "TRANSACTIONS"), including: (i) fees paid to investment bankers and their counsels, (ii) fees paid to outside counsel, including those who are giving legal opinions, (iii) fees paid to effect all of the Transfers, including (A) consent payments and fees and expenses in respect of the transfer of JEFG's 8 7/8% Senior Notes due 2004 (the "8 7/8% NOTES") and the 7 1/2% Notes to Holding pursuant to the Assumption, not to exceed the aggregate amount set forth in Section 7(d)(iii) of the Disclosure Schedule, and (B) payments to landlords, third parties or others to whom JEFG has given guarantees in order to obtain their consents to the release of JEFG from the related obligations, (iv) professional and closing fees (but excluding financing costs) paid in order to replace financing arrangements that have been affected by the Transactions or new financing arrangements of ITGI or the Surviving Corporation, (v) fees paid to compensation and benefit plan consultants, actuaries, and the like to the extent services are rendered (a) for changes to existing plans which are necessary in order to effect or because of the Transactions or (b) to implement new plans which will replace plans which had been in place at JEFG or ITGI prior to the Transactions, excluding fees for services rendered to implement new plans which are not substantially similar in purpose and effect to existing JEFG plans and costs related to enhanced pension benefits and any underfunding liability of existing plans, (vi) payments to the ITGI Special Committee and their counsel, (vii) costs of acquiring and installing (and licensing fees limited to first year licensing fees for) software by ITGI, but only to the extent that such systems provide reasonably similar information and functionality as that currently used or provided by JEFG or ITGI, (viii)tax, accounting and auditing services provided by KPMG LLP and Ernst & Young LLP in connection with the Transactions, and A-19 (ix) costs of securityholder matters (exclusive of matters addressed in clause (iii)(A) above) and agency matters related to the Transactions, including solicitation, printing, mailing, registrar and transfer agent fees, exchange agent, distribution agent, trustee and escrow agent fees and expenses, filing fees, listing fees and other regulatory fees and licenses. Expenses of JEFG and Holding which may constitute Transaction Expenses relevant for the allocation in the second succeeding sentence shall be counted on a dollar-for-dollar basis for Transaction Expenses incurred which are not tax deductible and on the basis of $0.565 for each dollar of Transaction Expenses incurred which are tax deductible and, based upon such procedure, shall not exceed $11.5 million in the aggregate. Expenses of ITGI which may constitute Transaction Expenses relevant for the allocation in the following sentence shall be counted on a dollar-for-dollar basis for Transaction Expenses incurred which are not tax deductible and on the basis of $0.565 for each dollar of Transaction Expenses incurred which are tax deductible and, based upon such procedure, shall not exceed $6.0 million. The allocation of responsibility for Transaction Expenses between JEFG and ITGI shall be determined by dividing (A) the sum of (i) the lesser of $11.5 million or the dollar amount of Transaction Expenses actually incurred by JEFG and Holding (with such lesser amount constituting the "REIMBURSABLE JEFG EXPENSE CAP") plus (ii) the lesser of $6.0 million or the dollar amount of Transaction Expenses actually incurred by ITGI (with such lesser amount constituting the "REIMBURSABLE ITGI EXPENSE CAP"), by (B) two (with the resulting amount constituting the "RATABLE TRANSACTION EXPENSE RESPONSIBILITY"). Following determination of the Ratable Transaction Expense Responsibility, (y) ITGI (or the Surviving Corporation, in the event such determination occurs after the Effective Time) shall reimburse JEFG (or Holding or its subsidiaries, in the event such determination occurs after the Effective Time) for any positive difference resulting after subtracting the Ratable Transaction Expense Responsibility from the Reimbursable JEFG Expense Cap or (z) JEFG (or Holding, in the event such determination occurs after the Effective Time) shall reimburse ITGI (or the Surviving Corporation, in the event such determination occurs after the Effective Time) for any positive difference resulting after subtracting the Ratable Transaction Expense Responsibility from the Reimbursable ITGI Expense Cap. Notwithstanding the foregoing, (A) expenses that would otherwise be incurred in the ordinary course of business or are the result of changes being implemented coincident with the JEFG Transactions at management's discretion do not qualify as Transaction Expenses, (B) when there is a range of options that may be taken with respect to an expense that fits within the matters described in clauses (i) through (ix) above, only the least expensive alternative qualifies as a Transaction Expense (and any amount in excess of the least expensive alternative shall be for the account of, and shall be the sole responsibility of, the party that incurred such expense), and (C) no services rendered or expenses incurred subsequent to the Effective Time (other than any such expenses incurred to comply with Section 3.01 of the Distribution Agreement) will qualify as Transaction Expenses. Notwithstanding any other provision set forth in this Paragraph (d), (A) JEFG shall be responsible for all Transaction Expenses in the event that JEFG, as a stockholder of ITGI, fails to vote in favor of the Merger Agreement and thereby causes the failure of the Merger Agreement to be approved and adopted at the ITGI Stockholders' Meeting, (B) ITGI shall be responsible for all Transaction Expenses in the event that ITGI breaches, or any of its subsidiaries breaches its representations, warranties or covenants contained in Section 6B(e)(ii), Section 6B(e)(iii), the second sentence of Section 6B(e)(iv), Section 7(a) (iii) or the second sentence of Section 7(j) hereof and such action causes an inability to satisfy any of the conditions set forth in Section 8(h) or 11(b) hereof, (C) any party that breaches Section 7(m) hereof shall be responsible for all Transaction Expenses, (D) any party that causes the condition set forth in Section 8(h) or 11(b) not to be fulfilled shall be responsible for all Transaction Expenses, and (E) JEFG shall be responsible for all Transaction Expenses in the event it participates, but does not afford the benefit to the ITGI Public Stockholders of their full participation, in a transaction described in Section 7(l) hereof. A-20 (e) Access to Information. From the date of this Agreement to the Effective Time, JEFG and ITGI shall afford the other and its accountants, counsel and designated representatives reasonable access (including using reasonable efforts to give access to persons or firms possessing information) and duplicating rights during normal business hours to all records, books, contacts, instruments, computer data and other data and information in its possession relating to the business and affairs of the other (other than data and information subject to an attorney-client or other privilege), insofar as such access is reasonably required by the other including, without limitation, for audit, accounting and litigation purposes. (f) Affiliates. Sections 7A(f)(i) and (ii) of the Disclosure Schedules list all persons who may currently be deemed to be "AFFILIATES" of JEFG and ITGI, respectively, for purposes of Rule 145 under the Securities Act ("AFFILIATES"), and each such party shall advise the other in writing of any person who becomes an Affiliate after the date hereof and prior to the Effective Time, and shall use its commercially reasonable efforts to cause each such person to deliver to the other party, at or prior to the Effective Time, a written agreement substantially in the form of Exhibit 7A(f) hereto. (g) Press Releases. Neither ITGI nor JEFG shall make or issue any press release or other public statement with respect to any of the transactions contemplated hereby without obtaining the prior written approval of the other, which consent shall not be unreasonably withheld. (h) Consents. JEFG agrees to use its reasonable best efforts to obtain all Governmental Consents referenced in Section 6A(c) hereof and the Consents listed on Section 6A(c) of the Disclosure Schedule. ITGI agrees to use its reasonable best efforts to obtain all Governmental Consents and other consents referenced in Section 6B(c) hereof. (i) Amendment of Distribution Agreement. JEFG shall not modify, amend or waive any provision of the Distribution Agreement, unless JEFG shall have obtained the consent of ITGI, which consent shall not be unreasonably withheld. (j) ITGI Lock-Up Covenants. ITGI agrees to refrain, and to cause its subsidiaries to refrain, from purchasing, or entering into options or contracts which would allow or obligate ITGI or any of its subsidiaries to purchase, JEFG Common Stock prior to the Effective Time. ITGI agrees to use its commercially reasonable efforts to obtain agreements from the holders of ITGI Common Stock Equivalents not to exercise such options prior to the earlier of (x) the Effective Time and (y) April 30, 1999. (k) Termination of Certain Intercompany Agreements. JEFG and ITGI agree that the Development Rights Agreement and the Intercompany Borrowing Agreement, each dated March 14, 1994, between JEFG and ITGI, shall be terminated effective as of the Pre-Closing without liability to any party thereunder, and each party will execute and deliver prior to the Pre-Closing such instruments as the other party reasonably may request to give effect to the foregoing. (l) Other JEFG Covenants Prior to Pre-Closing. In the event that at any time prior to the Pre-Closing, JEFG receives a third party offer to purchase its entire equity interest in ITGI, JEFG agrees to use its commercially reasonable best efforts to endeavor to obtain, but shall not be obligated to obtain, the same economic terms and benefits of such offer for the benefit of the ITGI Public Stockholders. (m) Standstill After Pre-Closing. Each of JEFG and ITGI agrees that it will not, at any time from and after the Pre-Closing and prior to the Effective Time, knowingly take any action that would result in ITGI's ceasing to be a member of the affiliated group (within the meaning of Section 1504(a) of the Code) of which JEFG is the parent. (n) JEFG Transfers of Liabilities. JEFG shall take all necessary action prior to the Pre-Closing Date in order to effect the transfer to Holding (or to JEFCO, as appropriate), after the Pre-Closing A-21 Date and prior to the Effective Time, of all JEFG Liabilities that are not related to ITGI or ITGI's subsidiaries. If, due to the inability of JEFG to transfer certain of such JEFG Liabilities to Holding or obtain for itself any required third party releases from such Liabilities or any required consent in connection with any transfer set forth in the preceding sentence, and therefore JEFG shall have Liabilities immediately prior to the Effective Time (excluding Liabilities related to ITGI or ITGI's subsidiaries, Liabilities of ITGI or the Surviving Corporation arising pursuant to this Agreement or the Ancillary Agreements, contingent Liabilities arising by operation of law and Liabilities related to asserted or unasserted litigation, the responsibility for which cannot be reasonably quantified or ascertained) (with such JEFG Liabilities, excluding the Liabilities in the preceding parenthetical, constituting the "RESIDUAL LIABILITIES"), JEFG shall take such action prior to the Pre-Closing Date, in form and substance reasonably satisfactory to ITGI, to discharge, offset, reserve against or otherwise mitigate the Residual Liabilities (through prepayments, reserves, insurance, defeasance, trust arrangements, replacement guarantees or the provision to third party creditors, landlords, ITGI or the Surviving Corporation of one or more letters of credit) for all Residual Liabilities in excess of the Applicable Amount (defined below). The "APPLICABLE AMOUNT" of unmitigated Residual Liabilities, as used in the preceding sentence, shall be $5.0 million from and after the Effective Time until the first anniversary thereof; $3.33 million from and after the first anniversary until the second anniversary of the Effective Time; $1.67 million from and after the second anniversary until the third anniversary of the Effective Time; and $0 from and after the third anniversary of the Effective Time. JEFG agrees to obtain, for the benefit of ITGI (or the Surviving Corporation after the Effective Time), one or more letters of credit in an aggregate undrawn face amount not less than the amount by which the aggregate unmitigated Residual Liabilities exceeds the Applicable Amount. Such letters of credit shall be issued by one or more nationally recognized financial institutions reasonably satisfactory to ITGI, be in form and substance reasonably satisfactory to ITGI and expire not earlier than 135 days after the date on which the related unmitigated Residual Liabilities terminate. 8. CONDITIONS TO THE OBLIGATIONS OF JEFG AND ITGI TO CONSUMMATE THE PRE-CLOSING The respective obligations of ITGI, on the one hand, and JEFG, on the other hand, to consummate the Pre-Closing are subject to the fulfillment (or waiver in writing by a duly authorized officer of the party which did not fail to satisfy such condition or requirement) of the following requirements and conditions: (a) Stockholder Approvals. This Agreement (including the Charter Amendment) and the issuance of JEFG Common Stock pursuant to this Agreement shall have been approved and adopted by the requisite votes of JEFG's stockholders in accordance with the DGCL, New York Stock Exchange requirements and the Organizational Documents of JEFG. This Agreement shall have been approved and adopted by the requisite votes of ITGI's stockholders in accordance with the DGCL and the Organizational Documents of ITGI. (b) No Injunctions or Restraints; Illegality. No temporary restraining order, preliminary or permanent injunction, sanction or other order issued by any court of competent jurisdiction, self-regulatory organization or body, stock exchange or other legal or regulatory restraint or prohibition shall have been issued and be in effect (i) restraining or prohibiting the consummation of the Merger, the Contribution, the Assumption, the Special ITGI Cash Dividend, the Distribution or the other transactions contemplated by the Ancillary Agreements or this Agreement or (ii) prohibiting or limiting the ownership, operation or control by the Surviving Corporation or JEFG or any of their respective subsidiaries of any portion of the business or assets of ITGI or its subsidiaries as of the Effective Time, or compelling the Surviving Corporation or JEFG or ITGI or any of their respective subsidiaries to dispose of, grant rights in respect of, or hold separate any portion of the business or assets of JEFG, ITGI or any of their respective subsidiaries as of the Effective Time; nor shall any action have been taken by a governmental regulatory authority, agency or instrumentality, self-regulatory organization or A-22 body, stock exchange or any federal, state or foreign statute, rule, regulation, executive order, decree or injunction shall have been enacted, entered, promulgated or enforced by any governmental regulatory authority, agency or instrumentality, self-regulatory organization or body, stock exchange or arbitrator, which is in effect and has the effect of making the Contribution, the Assumption, the Special ITGI Cash Dividend, the Distribution or the Merger, illegal or otherwise prohibiting the consummation of the Contribution, the Assumption, the Special ITGI Cash Dividend, the Distribution or the Merger. (c) Proxy/Prospectus and Proxy/Information Statement. The registration statement with respect to the Proxy/Prospectus shall have been declared effective under the Securities Act and no stop orders with respect thereto shall have been issued and the Proxy/Prospectus shall have been furnished to the stockholders of ITGI. JEFG shall have received all requisite authorizations under all applicable state securities or blue sky laws necessary to consummate the issuance of JEFG Common Stock pursuant to this Agreement. The Proxy/Information Statement shall have been furnished to the stockholders of JEFG. (d) NYSE Listing. Approval for listing by the New York Stock Exchange, Inc. upon official notice of issuance of JEFG Common Stock to be issued in the Merger shall have been received by JEFG. (e) Supplemental Indentures. Supplemental indenture(s) in form and substance satisfactory to JEFG and ITGI shall have been duly executed in respect of the 8 7/8% Notes, pursuant to which, effective as of the date the Transfers are completed, Holding shall assume, and JEFG shall be released from, JEFG's obligations under the 8 7/8% Notes and the related indenture. ITGI and its counsel shall have been provided complete copies of such supplemental indenture(s) and the officers' certificate(s) and opinion(s) of JEFG's counsel (which expressly permit(s) ITGI to rely thereon) provided to the trustee for the 8 7/8% Notes in connection therewith, and such officer's certificate(s) and opinion(s) shall be satisfactory in form and substance to ITGI. (f) Accounting Advisory Letter. ITGI and JEFG shall have received a letter from KPMG LLP, dated as of the Pre-Closing Date, substantially in the form set forth in Section 8(f) of the Disclosure Schedule. (g) Escrow. The Escrow Agreement shall have been executed and delivered by JEFG, ITGI and the Escrow Agent, and all items required to be delivered into escrow thereunder shall have been delivered, to be released by the Escrow Agent in accordance with the terms and conditions thereof. (h) JEFG's Maintenance of Minimum Ownership Levels of ITGI Common Stock. JEFG and ITGI shall be reasonably satisfied that, at all relevant times prior to the Pre-Closing Date, JEFG owns at least 80% of the outstanding ITGI Common Stock and that no capital stock of ITGI (other than ITGI Common Stock) shall have been issued or outstanding. (i) Satisfaction of Distribution Agreement Conditions. All conditions to the Distribution set forth in Section 2.02 of the Distribution Agreement shall have been satisfied and if any condition shall not have been satisfied as of the Pre-Closing Date such condition shall have been waived by JEFG, in its sole discretion. (j) Absence of Withdrawal or Amendment of Tax Ruling. The tax ruling from the Internal Revenue Service relating to the Transfers, the Distribution and certain aspects of the Merger obtained prior to the date hereof (the "TAX RULING") shall not have been, prior to the Pre-Closing, withdrawn by the IRS or modified by the IRS in any material adverse respect. A-23 9. CONDITIONS TO THE OBLIGATIONS OF JEFG TO CONSUMMATE THE PRE-CLOSING The obligations of JEFG under this Agreement to effect the Pre-Closing are subject to the fulfillment (or waiver in writing by a duly authorized officer of JEFG), prior to or at the Pre-Closing, of each of the following conditions: (a) Representations, Warranties and Covenants of ITGI. The representations and warranties of ITGI herein contained shall be true and correct as of the Pre-Closing Date in all material respects with the same effect as though made at such time, except to the extent waived hereunder or affected by the transactions contemplated herein; ITGI shall have performed in all material respects all obligations and complied in all material respects with all agreements, undertakings, covenants and conditions required by this Agreement and the Ancillary Agreements to be performed or complied with by it at or prior to the Pre-Closing Date; and ITGI shall have delivered to JEFG a certificate in form and substance satisfactory to JEFG dated the date of the Pre-Closing Date and signed by the chief executive officer and the chief financial officer of ITGI to such effect. (b) Consents. ITGI shall have obtained all Governmental Consents and shall have obtained all other Consents referenced in Section 6B(c) and designated to be required to have been obtained on or prior to the Pre-Closing. (c) Opinions of Counsel. (i) ITGI shall have delivered to JEFG opinions, dated the Pre-Closing Date, satisfactory to counsel for JEFG, of Cahill Gordon & Reindel, counsel to ITGI, to the effect that: (1) ITGI is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation and has the requisite corporate power to enter into and perform its obligations under this Agreement. (2) The execution, delivery and performance of this Agreement and the consummation of the Merger as provided herein by ITGI have been duly authorized and approved by all requisite corporate action; this Agreement has been duly executed and delivered by ITGI and constitutes a valid and binding obligation of ITGI, enforceable in accordance with its terms, subject to any bankruptcy, insolvency, moratorium or other laws affecting the enforcement of creditors' rights and by general principles of equity. (3) Upon the filing of the appropriate certificate of merger with the Secretary of State of the State of Delaware, the Merger shall be effective in accordance with the terms of this Agreement and the DGCL. (4) All such approvals, consents, authorizations or modifications as may, to the knowledge of such counsel, be required to permit the performance by ITGI of its respective obligations under this Agreement and consummation of the transactions herein contemplated have been obtained (whether from Governmental Authorities or other persons). In rendering its opinion letter, Cahill Gordon & Reindel may rely on certificates of officers of ITGI or its subsidiaries or government officials, opinions of other counsel and such other evidence as such counsel for ITGI may deem necessary or desirable. (ii) JEFG shall have received an opinion of Morgan, Lewis & Bockius LLP, in form and substance reasonably satisfactory to JEFG and substantially in the form of Appendix F (following Morgan, Lewis & Bockius LLP's receipt of representations of officers of ITGI and JEFG substantially in the form of Appendices G-1 and G-2), on the basis of certain facts, representations and assumptions set forth in such opinion, dated the Pre-Closing Date, to the effect that, with respect to the ITGI Public Stockholders, the Merger will be treated for federal income tax purposes as a reorganization qualifying under the provisions of Section 368(a) of the Code, and A-24 that each of JEFG and ITGI will be a party to the reorganization within the meaning of Section 368(b) of the Code. 10. CONDITIONS TO THE OBLIGATIONS OF ITGI TO CONSUMMATE THE PRE-CLOSING The obligations of ITGI under this Agreement to effect the Pre-Closing are subject to the fulfillment (or waiver in writing by a duly authorized officer of ITGI), prior to or at the Pre-Closing, of each of the following conditions: (a) Representations, Warranties and Covenants of JEFG. The representations and warranties of JEFG herein contained shall be true and correct as of the Pre-Closing Date in all material respects with the same effect as though made at such time, except to the extent waived hereunder or affected by the transactions contemplated herein; JEFG shall have performed in all material respects all obligations and complied in all material respects with all agreements, undertakings, covenants and conditions required by this Agreement and the Ancillary Agreements to be performed or complied with by it at or prior to the Pre-Closing Date; and JEFG shall have delivered to ITGI a certificate in form and substance satisfactory to ITGI dated the Pre-Closing Date and signed by the chief executive officer and the chief financial officer of JEFG to such effect. (b) [Intentionally Omitted]. (c) [Intentionally Omitted]. (d) Options. JEFG shall have delivered to ITGI a copy (certified by the Secretary of JEFG) of duly adopted resolutions of the Board of Directors of JEFG accelerating the vesting and exercisability of all options to purchase or acquire JEFG Common Stock, which acceleration shall be effective on or before the release of the Special ITGI Cash Dividend pursuant to the Escrow Agreement. JEFG shall have caused all outstanding JEFG Common Stock Equivalents to have been exercised or canceled, or exchanged (conditioned upon completion of the Distribution) for options, shares, or common stock equivalents of Holding as of, or within two business days following the Pre-Closing Date, or reserved against without the Surviving Corporation's responsibility after the Effective Time. (e) Transfer and Releases. JEFG shall have taken all necessary action to effect the transfer (after the Pre-Closing Date before the Effective Time) of all JEFG Liabilities, excluding the Residual Liabilities, to Holding and to provide that the unmitigated Residual Liabilities shall not be in excess of the Applicable Amount. (f) Consents. JEFG shall have obtained all Governmental Consents referenced in Section 6A(c) hereof and shall have obtained all Consents listed in Section 10(f) of the Disclosure Schedule. (g) Opinion of Counsel. (i) JEFG shall have delivered to ITGI an opinion, dated the Pre-Closing Date, satisfactory to counsel for ITGI, of Morgan, Lewis & Bockius LLP, counsel for JEFG, to the effect that: (1) JEFG is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation, and has the requisite corporate power to enter into and perform its obligations under this Agreement. (2) The execution, delivery and performance of this Agreement by JEFG and the Ancillary Agreements by JEFG and Holding and the issuance of JEFG Common Stock pursuant to this Agreement have been duly authorized and approved by all requisite corporate action; this Agreement has been duly executed and delivered by JEFG and constitutes a valid and binding obligation of JEFG enforceable against JEFG in accordance with its terms, subject to any bankruptcy, insolvency, moratorium or other laws affecting the enforcement of creditors' rights and general A-25 principles of equity; the Ancillary Agreements have been duly executed and delivered by JEFG and Holding, and constitute a valid and binding obligation of JEFG and Holding and are enforceable in accordance with their terms, subject to any bankruptcy, insolvency, moratorium or other laws affecting the enforcement of creditors' rights and general principles of equity. (3) Upon the filing of the appropriate certificate of merger with the Secretary of State of the State of Delaware, the Merger shall be effective in accordance with the terms of this Agreement and the DGCL. (4) All such approvals, consents, authorizations or modifications as may, to the knowledge of such counsel, be required to permit the performance by JEFG of its respective obligations under this Agreement and consummation of the transactions herein contemplated have been obtained (whether from Governmental Authorities or other persons). (5) The JEFG Common Stock to be issued by JEFG as contemplated by this Agreement has been duly authorized and upon delivery to the ITGI Public Stockholders, will be duly and validly issued, fully paid and non-assessable, and will not have been issued in violation of any statutory preemptive rights of stockholders. In rendering its opinion letter, Morgan, Lewis & Bockius LLP may rely on certificates of officers of JEFG, opinions of other counsel and such other evidence as such counsel for JEFG may deem necessary or desirable. (ii) ITGI shall have received an opinion of Cahill Gordon & Reindel, in form and substance reasonably satisfactory to ITGI and substantially in the form of Appendix H (following Cahill Gordon & Reindel's receipt of representations of officers of ITGI and JEFG substantially in the form of Appendices I-1 and I-2), on the basis of certain facts, representations and assumptions set forth in such opinion, dated the Pre-Closing Date, to the effect that the Merger will be treated for federal income tax purposes from the perspective of the ITGI Public Stockholders as a reorganization qualifying under the provisions of Section 368(a) of the Code, and that each of JEFG and ITGI will be a party to the reorganization within the meaning of Section 368(b) of the Code. (h) Amendment of Distribution Agreement. No provision of the Distribution Agreement shall have been modified, amended or waived without the prior written consent of ITGI, which consent shall not be unreasonably withheld. (i) Other. All certificates, consents and opinions, including any provision therein permitting ITGI to rely thereon, delivered in connection with the supplemental indentures referred to in Section 6(A)(t) shall not have been withdrawn. (j) Procurement of Any Necessary Letters of Credit. JEFG shall have procured and delivered to ITGI all necessary letters of credit concerning unmitigated Residual Liabilities in excess of the Applicable Amount as may be required by Section 7(n) hereof. 11. CONDITIONS TO THE OBLIGATIONS OF JEFG AND ITGI TO CONSUMMATE THE MERGER The obligations of each of JEFG and ITGI under this Agreement to effect the Merger are subject to the fulfillment (or waiver in writing by a duly authorized officer of JEFG and ITGI), prior to or at the Effective Time, of each of the following conditions: (a) Pre-Closing Consummated. The Pre-Closing shall have been consummated in accordance with this Agreement and the Escrow Agreement shall have been fully complied with. A-26 (b) JEFG's Maintenance of Minimum Ownership Levels of ITGI Common Stock. JEFG and ITGI shall be reasonably satisfied that, at all relevant times prior to the Effective Time, JEFG owns at least 80% of the outstanding ITGI Common Stock and that no capital stock of ITGI (other than ITGI Common Stock) shall have been issued or outstanding. (c) Absence of Withdrawal or Amendment of Tax Ruling. The Tax Ruling shall not have been, prior to the Effective Time, withdrawn by the IRS or modified by the IRS in any material adverse respect. 12. NO SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS The representations, warranties, covenants and other obligations of JEFG and ITGI hereunder shall not survive the Merger; PROVIDED, HOWEVER, that Section 7(d) hereof shall survive (i) the Merger in accordance with Section 12.01 of the Distribution Agreement and (ii) any termination of this Agreement prior to the Effective Time pursuant to Section 13 hereof. 13. TERMINATION (a) This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time prior to the completion of the Pre-Closing (i) by mutual written consent of JEFG and ITGI or (ii) by either party upon (x) the failure of the other party to satisfy any covenant or agreement set forth in this Agreement or the Ancillary Agreements or (y) upon the discovery of any representation of the other party which is false in any material respect or for which there is a material omission to disclose information which makes any representation of the other party materially misleading or (z) the failure to satisfy any condition set forth in Section 8 hereof or the failure of the other party to satisfy a condition to such party's obligation to consummate the Pre-Closing set forth in Section 9 or 10 hereof, as applicable. (b) This Agreement may be terminated and the transactions contemplated hereby may be abandoned at any time after completion of the Pre-Closing and prior to the Closing (i) by mutual written consent of JEFG and ITGI or (ii) by either party upon the failure of the condition set forth in Section 11(b) or 11(c) hereof to be satisfied unless and to the extent such failure occurred as a result of such party's breach of any representation, warranty or covenant set forth in this Agreement. 14. ENTIRE AGREEMENT This Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes all prior written and oral and all contemporaneous oral agreements and understandings with respect to the subject matter hereof. 15. NOTICES All notices and communications under this Agreement shall be in writing and any communication or delivery hereunder shall be deemed to have been duly given when received addressed as follows: If to ITGI to: Investment Technology Group, Inc. 380 Madison Avenue, 4th Floor New York, New York 10017 Attention: Chief Financial Officer A-27 With a copy to: Cahill Gordon & Reindel 80 Pine Street New York, New York 10005 Attention: Immanuel Kohn, Esq. If to JEFG to: Jefferies Group, Inc. 11100 Santa Monica Boulevard, 11th Floor Los Angeles, California 90025 Attention: Chief Financial Officer With a copy to: Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, PA 19103-2921 Attention: Brian J. Lynch, Esq. Such notices shall be deemed received (i) as of the date of delivery by hand delivery, (ii) one business day after such notice is given to a national overnight delivery service or (iii) five business days after placed in the United States mail, provided such mail is sent by certified mail with return receipt requested. Either party may, by written notice so delivered to the other party, change the address to which delivery of any notice shall thereafter be made. 16. GOVERNING LAW This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware regardless of the laws that might otherwise govern under principles of conflicts of laws applicable thereto. 17. COUNTERPARTS This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. IN WITNESS WHEREOF, each of the parties has caused this Agreement to be executed on its behalf by its officers thereunto duly authorized on the day and year first above written. JEFFERIES GROUP, INC. By: /s/ CLARENCE T. SCHMITZ -------------------------------------- Name: Clarence T. Schmitz Title: Executive Vice President and Chief Financial Officer INVESTMENT TECHNOLOGY GROUP, INC. By: /s/ RAYMOND L. KILLIAN, JR. -------------------------------------- Name: Raymond L. Killian, Jr. Title: Chairman, Chief Executive Officer and President A-28 EX-2.2 3 EX-2.2 APPENDIX B DISTRIBUTION AGREEMENT DATED AS OF MARCH 17, 1999 BETWEEN JEFFERIES GROUP, INC. AND JEF HOLDING COMPANY, INC. TABLE OF CONTENTS
PAGE ----- ARTICLE I--DEFINITIONS..................................................................................... 2 Section 1.01. Definitions.............................................................................. 2 ARTICLE II--THE DISTRIBUTION............................................................................... 7 Section 2.01. Cooperation Prior to the Distribution.................................................... 7 Section 2.02. JEFG Board Action; Conditions Precedent to the Distribution.............................. 8 Section 2.03. The Distribution......................................................................... 9 ARTICLE III--CONVEYANCE OF ASSETS, OBLIGATIONS AND RIGHTS; ASSUMPTION OF LIABILITIES; CONDUCT OF HOLDING PENDING DISTRIBUTION..................................................................................... 9 Section 3.01. Conveyance of Assets, Obligations and Rights; Assumption and Release of Liabilities...... 9 Section 3.02. Conduct of Holding and JEFG Pending Distribution......................................... 11 Section 3.03. Further Assurances and Consents.......................................................... 11 ARTICLE IV--INDEMNIFICATION................................................................................ 12 Section 4.01. Holding Indemnification of the ITGI Group................................................ 12 Section 4.02. ITGI Indemnification of the Holding Group................................................ 12 Section 4.03. Insurance and Third Party Obligations.................................................... 12 ARTICLE V--HOLDING REPRESENTATIONS......................................................................... 12 Section 5.01. Holding Representations.................................................................. 12 ARTICLE VI--INDEMNIFICATION PROCEDURES; CONTRIBUTION....................................................... 14 Section 6.01. Notice and Payment of Claims............................................................. 14 Section 6.02. Notice and Defense of Third-Party Claims................................................. 14 Section 6.03. Contribution............................................................................. 15 ARTICLE VII--EMPLOYEE MATTERS.............................................................................. 16 Section 7.01. Benefits Agreement....................................................................... 16 ARTICLE VIII--TAX MATTERS.................................................................................. 16 ARTICLE IX--ACCOUNTING MATTERS............................................................................. 16 Section 9.01. Accounting Treatment of Assets Transferred............................................... 16 ARTICLE X--INFORMATION..................................................................................... 16 Section 10.01. Provision of Corporate Records.......................................................... 17 Section 10.02. Access to Information................................................................... 17 Section 10.03. Litigation Cooperation.................................................................. 17 Section 10.04. Reimbursement........................................................................... 17 Section 10.05. Retention of Records.................................................................... 17 Section 10.06. Confidentiality......................................................................... 17 ARTICLE XI--INTEREST ON PAYMENTS........................................................................... 18
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PAGE ----- ARTICLE XII--MISCELLANEOUS................................................................................. 18 Section 12.01. Expenses................................................................................ 18 Section 12.02. Notices................................................................................. 19 Section 12.03. Amendment and Waiver.................................................................... 20 Section 12.04. Entire Agreement........................................................................ 20 Section 12.05. Parties in Interest..................................................................... 20 Section 12.06. Disputes................................................................................ 20 Section 12.07. Survival................................................................................ 21 Section 12.08. Severability............................................................................ 21 Section 12.09. Governing Law........................................................................... 21 Section 12.10. Counterparts............................................................................ 21
Schedule A -- Holding Provided Information Concerning the Merger Schedule B -- ITGI Provided Information Concerning the Merger
ii DISTRIBUTION AGREEMENT This Distribution Agreement ("AGREEMENT"), dated as of March 17, 1999, is hereby entered into by and between Jefferies Group, Inc., a Delaware corporation ("JEFG"), and JEF Holding Company, Inc., a Delaware corporation and wholly-owned subsidiary of JEFG as of the date of this Agreement ("HOLDING"). RECITALS WHEREAS, the Board of Directors of JEFG has approved the business transactions pursuant to which all the assets, businesses and Liabilities (as defined below) of Investment Technology Group, Inc., a Delaware corporation and approximately 80.5% owned subsidiary of JEFG ("ITGI"), and ITGI's subsidiaries will be separated from all other assets, businesses and Liabilities of JEFG, on the terms and subject to the conditions set forth herein and in the Ancillary Agreements (as defined below); WHEREAS, concurrently herewith, JEFG and ITGI are entering into an Agreement and Plan of Merger (the "MERGER AGREEMENT"), pursuant to which (x) ITGI will merge (the "MERGER") with and into JEFG and (y) all outstanding shares of common stock, par value $0.01 per share, of ITGI (the "ITGI COMMON STOCK") will be canceled or converted into the right to receive shares of common stock, par value $0.01 per share, of JEFG (the "JEFG COMMON STOCK") in the manner set forth in the Merger Agreement; WHEREAS, prior to the Distribution (defined below) and Merger (x) JEFG will transfer to Holding (or to JEFCO, defined herein, prior to the time JEFCO becomes a subsidiary of Holding in connection with the Contribution, defined below), and Holding and JEFCO will accept from JEFG, all of the Assets of JEFG other than JEFG's ownership interest in capital stock of ITGI (the "CONTRIBUTION"), and JEFG will assign to Holding (or to JEFCO, as appropriate), and Holding and JEFCO will assume from JEFG, all of the Holding Liabilities (as defined herein) (individually, the "ASSUMPTION" and together with the Contribution, collectively, the "TRANSFERS"), and (y) following the Transfers and the satisfaction of all conditions set forth in Section 2.02 of this Agreement, all of the common stock of Holding, par value $0.0001 per share ("HOLDING COMMON STOCK"), will be distributed (the "DISTRIBUTION") to JEFG's stockholders at the rate of one share of Holding Common Stock for each share of JEFG Common Stock outstanding as of April 20, 1999, or such other date as is designated by JEFG's Board of Directors as the record date for determining the stockholders of JEFG entitled to receive the Distribution (the "RECORD DATE"); WHEREAS, (i) pursuant to the Merger, the name of Jefferies Group, Inc. (as the surviving corporate entity in the Merger) will be changed to Investment Technology Group, Inc. and (ii) following the consummation of the Distribution and the Merger, the name of JEF Holding Company, Inc. will be changed to Jefferies Group, Inc.; WHEREAS, it is intended that the Distribution not be taxable to JEFG or its stockholders pursuant to Section 355 of the Internal Revenue Code of 1986, as amended (the "CODE"); WHEREAS, as of March 16, 1999, the Board of Directors of ITGI declared, subject to the approval and adoption of the Merger Agreement by the stockholders of JEFG and ITGI and the satisfaction or waiver of all other conditions to the Pre-Closing (as defined in the Merger Agreement) as set forth in the Merger Agreement, a cash dividend in an amount equal to $4.00 per share to all holders of ITGI Common Stock, including JEFG (the "SPECIAL ITGI CASH DIVIDEND"); B-1 NOW, THEREFORE, in consideration of the foregoing premises and the mutual agreements and covenants contained in this Agreement, the parties hereby agree as follows: ARTICLE I DEFINITIONS Section 1.01. DEFINITIONS. As used herein, the following terms have the following meaning: "Action" means any claim, suit, arbitration, inquiry, proceeding or investigation by or before any court, governmental or other regulatory or administrative agency or commission or any other tribunal. "Analytical" means Jefferies Analytical Trading Group, Inc., a Delaware corporation. "Ancillary Agreements" means the Benefits Agreement and the Tax Agreement and all of the written agreements, instruments, understandings, assignments and other arrangements entered into in connection with the transactions contemplated hereby excluding, however, the Merger Agreement and all instruments and documents related thereto. "Assets" means all properties, rights, contracts, leases and claims, of every kind and description, wherever located, whether tangible or intangible, and whether real, personal or mixed. "Assumption" is defined in the recitals to this Agreement. "Benefits Agreement" means the Benefits Agreement entered into in connection with the Distribution between JEFG and Holding, as amended from time to time. "Code" is defined in the recitals to this Agreement. "Commission" means the Securities and Exchange Commission. "Contribution" is defined in the recitals to this Agreement. "Distribution" is defined in the recitals to this Agreement. "Distribution Agent" means EquiServe, in its capacity as agent for JEFG in connection with the Distribution. "Distribution Date" means April 27, 1999 or such other business day as of which the Distribution shall be effective, as determined by the Board of Directors of JEFG; provided, however, that the Distribution Date shall occur (in time) prior to the Effective Time. "Effective Time" means the date and time at which the Merger is consummated. "Exchange Act" means the Securities Exchange Act of 1934, as amended. "Form S-4" means the registration statement on Form S-4 filed by JEFG pursuant to the Securities Act with respect to the JEFG Common Stock issuable in the Merger pursuant to the Merger Agreement, as such registration statement may be amended from time to time. "Form 10" means the registration statement on Form 10 filed by Holding with the Commission to effect the registration of the class of Holding Common Stock pursuant to the Exchange Act, as such registration statement may be amended from time to time. "Group" means the ITGI Group or the Holding Group, as applicable. "Holding" is defined in the preamble to this Agreement. "Holding Assets" means all Assets of JEFG (a) including without limitation (1) all of the capital stock, and options, warrants or other rights to purchase capital stock, of Analytical, Investment, Japan, JEFCO, JIL, Licensing, Pacific, and Switzerland, and all of the preferred stock and options, warrants or B-2 other rights to purchase capital stock (including all of the common stock) of W&D, (2) all cash, receivables, marketable securities and real and personal property of JEFG, (3) all Assets that are (i) owned of record by or held in the name of a member of the Holding Group, (ii) used exclusively by one or more members of the Holding Group prior to, on or following the Effective Time and (4) the names "Jefferies," "Jefferies Group" and "Jefferies Group, Inc." and all variations thereof and all trademarks, trade names, copyrights or other intellectual property right related thereto, but (b) excluding the capital stock of ITGI. "Holding Business" means the businesses conducted by JEFG prior to or at the Effective Time or by any member of the Holding Group prior to, on and following the Effective Time, excluding in each such case the ITGI Business. "Holding By-laws" means the By-laws of Holding in the form filed as an exhibit to the Form 10, as last amended, under the Exchange Act. "Holding Certificate" means the certificate of incorporation of Holding in the form filed as an exhibit to the Form 10, as last amended, under the Exchange Act. "Holding Common Stock" is defined in the recitals to this Agreement. "Holding Group" shall mean Holding, Analytical, Investment, Japan, JEFCO, JIL, Licensing, Pacific, Switzerland and W&D and their successors and permitted assigns. "Holding Liabilities" means (i) all Liabilities of Holding under this Agreement, any Intercompany Agreement or any Ancillary Agreement, (ii) except as otherwise expressly provided in this Agreement, any Intercompany Agreement or any Ancillary Agreement, all Liabilities, other than ITGI Group Liabilities, (x) of JEFG, to the extent those Liabilities arise out of or relate to any event, occurrence, act, omission or state of affairs that occurred or existed prior to the Effective Time, (y) of any member of the Holding Group or the Holding Business, whether arising before, on or after the Effective Time or (z) arising out of the ownership or use of the Holding Assets, whether arising before, on or after the Effective Time, (iii) all Liabilities arising under or in connection with the Form 10 unless and except to the extent that such claims are based upon the ITGI Provided Information, (iv) subject to the provisions of Section 12.01 of this Agreement, all Liabilities comprising the JEFG Debt Obligation, (v) all Liabilities arising with respect to claims based upon the Holding Provided Information included or incorporated by reference into the Form S-4 and (vi) Liabilities of JEFG under options or other rights to purchase or acquire any JEFG Common Stock, to the extent such options or rights, prior to the Effective Time, are not exercised for JEFG Common Stock, canceled or exchanged for options to purchase shares of Holding Common Stock. "Holding Provided Information" means information included or incorporated by reference into the Form S-4, Form 10, or Joint Proxy/Information Statement that relates exclusively to JEFG (excluding ITGI and its subsidiaries) prior to the Effective Time, the consolidated financial statements and financial and statistical data of JEFG (excluding the financial statements and statistical and financial data of ITGI and its subsidiaries), any member of the Holding Group, the Holding Business, the Ancillary Agreements, the Transfers, the Distribution or the Holding provided information concerning the Merger as set forth in Schedule A attached hereto and made a part hereof. "Intercompany Agreements" means an amended and restated tax sharing agreement, dated March 17, 1999, between JEFG, Holding and ITGI. "Investment" means JEF Investment Company, a Delaware corporation. "ITGI" means Investment Technology Group, Inc., a Delaware corporation, before and/or after the Merger, as the context requires as set forth herein. B-3 "ITGI Business" means the businesses conducted exclusively by ITGI and its subsidiaries prior to, on and following the Effective Time. "ITGI Common Stock" is defined in the recitals to this Agreement. "ITGI Group" means ITGI and its subsidiaries prior to, on and following the Effective Time. "ITGI Group Liabilities" means (i) all Liabilities of ITGI (in its own right or as the successor to JEFG following the Merger) under Sections 4.02 and 12.01 of this Agreement, or under any Intercompany Agreement or any Ancillary Agreement, (ii) except as otherwise expressly provided in this Agreement, any Intercompany Agreement or any Ancillary Agreement, all Liabilities (other than Holding Liabilities) of ITGI, any member of the ITGI Group or the ITGI Business or Liabilities arising out of the ownership or use of the Assets of the ITGI Group, in each case whether arising before, on or after the Effective Time, (iii) all Liabilities with respect to claims based upon the ITGI Provided Information included and incorporated by reference into the Form 10 and Joint Proxy/ Information Statement, and (iv) all Liabilities arising with respect to claims based upon ITGI Provided Information included or incorporated by reference into the Form S-4. "ITGI Provided Information" means information included or incorporated by reference into the Form S-4, Form 10 or Joint Proxy/Information Statement that relates exclusively to ITGI, any member of the ITGI Group, the ITGI Business, JEFG after the Effective Time, the consolidated historical financial statements of ITGI, the pro forma consolidated financial statements of ITGI (as the successor to JEFG following the Merger), the financial and statistical data of ITGI, the Special ITGI Cash Dividend or the ITGI provided information concerning the Merger as set forth in Schedule B attached hereto and made a part hereof. "Japan" means Jefferies (Japan) Limited, a company formed under the laws of England. "JEFCO" shall mean Jefferies & Company, Inc., a Delaware corporation. "JEFG" is defined in the preamble to this Agreement. "JEFG Common Stock" is defined in the recitals to this Agreement. "JEFG Contribution" means an amount of money to be contributed by JEFG to the capital of JEFCO prior to the Distribution Date equal to at least $60 million. "JEFG Debt Obligation" means the Liabilities of JEFG in respect of its 8 7/8% Senior Notes due 2004 and 7 1/2% Senior Notes due 2007, including, without limitation, the related indentures (including all supplemental indentures thereto), consent solicitations and offering materials. "JIL" means Jefferies International Limited, a company formed under the laws of England. "Joint Proxy/Information Statement" means the joint proxy/information statement, as amended from time to time, filed by JEFG and Holding with the SEC under the Exchange Act to be sent to each holder of JEFG Common Stock in connection with the Distribution and the Merger. "Liabilities" means any and all claims, debts, commitments, liabilities and obligations, absolute or contingent, matured or not matured, liquidated or unliquidated, accrued or unaccrued, known or unknown, whenever arising, including all costs and expenses relating thereto, and including, without limitation, those debts, commitments, liabilities and obligations arising under this Agreement, any law, rule, regulation, action, order or consent decree of any governmental entity or any award of any arbitrator of any kind, and those arising under any contract, commitment or undertaking. "Licensing" means Jefferies Licensing Corporation, a Delaware corporation. "Merger" is defined in the recitals to this Agreement. "Merger Agreement" is defined in the recitals to this Agreement. B-4 "Pacific" means Jefferies Pacific Limited, a company formed under the laws of Hong Kong. "Record Date" is defined in the recitals to this Agreement. "SEC" means the Securities and Exchange Commission. "Securities Act" means the Securities Act of 1933, as amended. "Special ITGI Cash Dividend" is defined in the recitals to this Agreement. "Switzerland" means Jefferies (Switzerland) Ltd., a company formed under the laws of Switzerland. "Tax" shall have the meaning given to such term in the Tax Agreement. "Tax Agreement" means the Tax Sharing and Indemnification Agreement entered into in connection with the Distribution among JEFG, Holding and ITGI, as amended from time to time. "Transfers" is defined in the recitals to this Agreement. "Transactions" shall mean the Transfers, the Distribution and the Merger. "W&D" means W&D Securities, Inc., a Delaware corporation. ARTICLE II THE DISTRIBUTION Section 2.01. COOPERATION PRIOR TO THE DISTRIBUTION. (a) JEFG and Holding shall prepare, and JEFG shall mail on or prior to the Distribution Date to the holders of JEFG Common Stock, the Joint Proxy/Information Statement, which shall set forth appropriate disclosure concerning Holding, the Distribution, the Merger and certain other matters required by the Exchange Act. JEFG and Holding shall also prepare, and Holding shall file with the Commission, the Form 10, which shall incorporate by reference portions of the Joint Proxy/Information Statement. JEFG and Holding shall use all reasonable efforts to cause the Form 10 to be declared, or become, effective under the Exchange Act as soon as reasonably practicable and on or before the Distribution Date. (b) JEFG and Holding shall cooperate in preparing, filing with the Commission under the Securities Act and causing to become effective any registration statements or amendments thereto that are appropriate to reflect the establishment of or amendments to any employee benefit plan contemplated by the Benefits Agreement. (c) JEFG and Holding shall, by means of a stock split or stock distribution, cause the number of outstanding shares of Holding Common Stock held by JEFG as of the Record Date to be equal to the number of shares of Holding Common Stock to be distributed in the Distribution. (d) JEFG and Holding shall take all such action as may be necessary or appropriate under the securities or blue sky laws of states or other political subdivisions of the United States in connection with the transactions contemplated by this Agreement or any Ancillary Agreement. (e) Holding shall prepare, file and pursue an application to succeed to the listing of JEFG and thereby effectuate the listing of the Holding Common Stock on the New York Stock Exchange, and such related matters and other matters as shall be required by the New York Stock Exchange. (f) On or prior to the Distribution Date, JEFG and Holding shall cooperate in carrying out the transactions and events described in Article III hereof. B-5 Section 2.02. JEFG BOARD ACTION; CONDITIONS PRECEDENT TO THE DISTRIBUTION. JEFG's Board of Directors shall, in its discretion, establish the Record Date and the Distribution Date and any appropriate procedures in connection with the Distribution. In no event shall the Distribution occur unless the following conditions shall have been satisfied: (a) any necessary regulatory approvals shall have been received; (b) the Form 10 shall have been declared, or become, effective under the Exchange Act; (c) ITGI shall have declared and paid the Special ITGI Cash Dividend to the holders of ITGI Common Stock, including JEFG; (d) the JEFG Contribution and the Transfers shall have been completed; (e) JEFG and the trustees under the indentures governing the JEFG Debt Obligation shall have executed supplemental indentures in form and substance satisfactory to JEFG and such trustees and their respective counsel, pursuant to which Holding shall assume, and JEFG shall be released from obligations concerning the JEFG Debt Obligation, effective as of the date the Transfers are completed; (f) Holding's Board of Directors, as named in the Form 10, shall have been elected by JEFG, as sole stockholder of Holding, as directors of Holding effective as of the Distribution Date, and the Holding Certificate and Holding By-laws shall be in effect; (g) the Holding Common Stock shall have been approved for listing on the New York Stock Exchange, subject to official notice of issuance; (h) The tax ruling obtained from the Internal Revenue Service ("IRS") on March 11, 1999 concerning the treatment of the Transfers and the Distribution and related transactions under Sections 332, 351, 355 and 368(a)(1)(D) of the Code shall not have been, prior to the Effective Time, withdrawn by the IRS or modified by the IRS in any material adverse respect; (i) all conditions to the Pre-Closing (as defined in the Merger Agreement) of the Merger shall have been satisfied or waived by JEFG or ITGI, as appropriate, and the Pre-Closing shall have been consummated; and (j) JEFG shall be reasonably satisfied that, at all relevant times prior to the Effective Time, JEFG owns at least 80% of the outstanding ITGI Common Stock and that no capital stock of ITGI (other than ITGI Common Stock) shall have been issued or outstanding. Section 2.03. THE DISTRIBUTION. On or before the Distribution Date, subject to satisfaction or waiver of the conditions set forth in this Agreement, JEFG shall deliver to the Distribution Agent a certificate or certificates representing all of the then outstanding shares of Holding Common Stock held by JEFG, endorsed in blank, and shall instruct the Distribution Agent to distribute to each holder of record of JEFG Common Stock as of the close of business on the Record Date a certificate or certificates representing one share of Holding Common Stock for each share of JEFG Common Stock held of record as of the close of business on the Record Date. Holding agrees to provide all certificates for shares of Holding Common Stock that the Distribution Agent shall require in order to effect the Distribution. ARTICLE III CONVEYANCE OF ASSETS, OBLIGATIONS AND RIGHTS; ASSUMPTION OF LIABILITIES; CONDUCT OF HOLDING PENDING DISTRIBUTION Section 3.01. CONVEYANCE OF ASSETS, OBLIGATIONS AND RIGHTS; ASSUMPTION AND RELEASE OF LIABILITIES. (a) Prior to the completion of the Transfers, JEFG shall make the JEFG Contribution. B-6 (b) Prior to the Distribution Date and effective with the Transfers (i) all Holding Assets are intended to be and shall become Assets of the Holding Group and (ii) all Holding Liabilities are intended to be and shall become exclusively the Liabilities of the Holding Group. (c) Prior to, or in connection with, the completion of the Transfers, JEFG shall transfer or cause to be transferred to Holding (or JEFCO, as appropriate), and JEFG shall disclaim (as appropriate) all right, title and interest of JEFG in and to any and all of the Holding Assets and the Holding Business. Effective as of the Transfers, all of JEFG's rights and obligations under the Intercompany Agreements shall be transferred and assigned, without limitation or alteration of the rights or responsibilities hereunder or thereunder, to Holding. (d) Before the Distribution Date, effective as of the date of the Transfers, Holding shall execute supplemental indentures in form and substance satisfactory to JEFG, the trustee under the Indentures governing the JEFG Debt Obligation and their respective counsel pursuant to which, among other things, Holding shall assume, and JEFG shall be released from, the JEFG Debt Obligation, all of which shall be effective prior to the Distribution Date. (e) Set forth on Schedule 3.01(e) hereto is each Holding Asset and each Holding Liability that requires a third-party consent to transfer such Holding Asset or Holding Liability from JEFG to Holding (or to JEFCO, as appropriate). If any such Holding Asset or Holding Liability may not be transferred by reason of the requirement to obtain the consent of any third party and such consent has not been obtained by the Distribution Date, then such Holding Asset or Holding Liability shall not be transferred until such consent has been obtained. In the event that any conveyance of an Asset constituting a Holding Asset or a Liability constituting a Holding Liability is not effected on or before the Distribution Date, the obligation to transfer such Asset or such Liability as the case may be, shall continue past the Distribution Date and shall be accomplished as soon thereafter as practicable. JEFG and its successors (including ITGI) will cooperate with Holding to provide, or cause the owner of such Holding Asset to use all reasonable efforts to provide, to the appropriate member of the Holding Group all the rights and benefits under such Holding Asset, or cause such owner to enforce such Holding Asset for the benefit of such member. Such parties shall otherwise cooperate and use all reasonable efforts to provide the economic and operational equivalent of an assignment or transfer of the Holding Asset or Holding Liability, as the case may be. Holding shall duly pay, perform or discharge, or cause the appropriate member of the Holding Group to duly pay, perform or discharge, from and after the date of the Transfers, each Holding Liability, including without limitation any Holding Liability referred to in the second sentence of this paragraph; provided, the foregoing provisions of this paragraph (e) do not affect Holding's obligation to assume all of the Holding Liabilities at the date of the Transfers and therefore duly pay, perform or discharge all of the Holding Liabilities from and after such time. (f) From and after the Distribution Date, each party shall promptly transfer or cause the members of its Group promptly to transfer to the other party or the appropriate member of the other party's Group, from time to time, any property held by any such party that pursuant to this Agreement is or is intended to be an Asset of the other party or a member of its Group. Without limiting the foregoing, funds received by a member of one Group upon the payment of accounts receivable that pursuant to this Agreement is or is intended to belong to a member of the other Group shall be transferred to the other Group by wire transfer not more than five business days after receipt of such payment. (g) Holding agrees that it will not, without the prior written consent of ITGI, take any action that attempts or purports to amend or modify any agreement, including any real property lease or sublease, to which JEFG is a party at or prior to the Transfers and from which (i) JEFG is not fully and unconditionally released at or prior to the Transfers and (ii) the Surviving Corporation (as the successor to JEFG pursuant to the Merger) is not fully and unconditionally released after the Merger. B-7 (h) Holding agrees to obtain and deliver to ITGI, for the benefit of ITGI one or more letters of credit in an aggregate undrawn face amount not less than the amount by which the aggregate unmitigated Residual Liabilities exceeds the Applicable Amount, consistent with the definitions and terms provided for under Section 7(n) of the Merger Agreement. Such letters of credit shall be issued by one or more nationally recognized financial institutions reasonably satisfactory to ITGI, be in form and substance reasonably satisfactory to ITGI and expire not earlier than 135 days after the date on which the related unmitigated Residual Liabilities terminate. Section 3.02. CONDUCT OF HOLDING AND JEFG PENDING DISTRIBUTION. (a) Prior to the Distribution Date, neither Holding nor JEFG shall, without the prior consent in writing of the other, make any public announcement concerning the Distribution and each party shall use its respective best efforts not to take any action which may prejudice or delay the consummation of the Distribution. (b) Prior to the Distribution Date, the business of Holding shall be operated for the sole benefit of JEFG as its sole stockholder. Section 3.03. FURTHER ASSURANCES AND CONSENTS. In addition to the actions specifically provided for elsewhere in this Agreement, each of the parties hereto will use its commercially reasonable efforts to (i) execute and deliver such further instruments and documents and take such other actions as any other party may reasonably request in order to effectuate the purposes of this Agreement and to carry out the terms hereof and (ii) take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable laws, regulations and agreements or otherwise to consummate and make effective the transactions contemplated by this Agreement, including, without limitation, using its reasonable efforts to obtain any consents and approvals and to make any filings and applications necessary or desirable in order to consummate the transactions contemplated by this Agreement. ARTICLE IV INDEMNIFICATION Section 4.01. HOLDING INDEMNIFICATION OF THE ITGI GROUP. On and after the Distribution Date, Holding shall indemnify, defend and hold harmless each member of the ITGI Group, and each of their respective directors, officers, employees and agents (the "ITGI Indemnitees") from and against any and all claims, costs, damages, losses, liabilities and expenses (including, without limitation, reasonable expenses of investigation and reasonable attorney fees and expenses, but excluding consequential damages of the indemnified party, in connection with any and all Actions or threatened Actions) (collectively, "Indemnifiable Losses") incurred or suffered by any of the ITGI Indemnitees and arising out of, or due to or otherwise in connection with any of the Holding Liabilities or the failure of Holding or any member of the Holding Group to assume, pay, perform or otherwise discharge any of the Holding Liabilities. Section 4.02. ITGI INDEMNIFICATION OF THE HOLDING GROUP. On and after the Distribution Date, ITGI (as the successor to JEFG following the Merger) shall indemnify, defend and hold harmless each member of the Holding Group and each of their respective directors, officers, employees and agents (the "Holding Indemnitees") from and against any and all Indemnifiable Losses incurred or suffered by any of the Holding Indemnitees and arising out of, or due to or otherwise in connection with any of the ITGI Group Liabilities or the failure of ITGI or any member of the ITGI Group to pay, perform or otherwise discharge any of the ITGI Group Liabilities. Section 4.03. INSURANCE AND THIRD PARTY OBLIGATIONS. No insurer or any other third party shall be (a) entitled to a benefit it would not be entitled to receive in the absence of the foregoing B-8 indemnification provisions, (b) relieved of the responsibility to pay any claims to which it is obligated or (c) entitled to any subrogation rights with respect to any obligation hereunder. ARTICLE V HOLDING REPRESENTATIONS Section 5.01. HOLDING REPRESENTATIONS. Holding represents and warrants to JEFG as follows: (a) Organization, Etc. Holding is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted. Holding is a newly formed corporation that, since formation and the initial capitalization effected thereby, has not acquired, assumed or become contractually obligated to acquire or assume any assets or liabilities, except as set forth on Schedule 5.01(a) hereof. Since formation, Holding has not conducted any activity other than the execution and delivery of this Agreement and the Ancillary Agreements and activities coincident with the Transfers and the Distribution and incidental hereunder and under the Ancillary Agreements, and other than that which is contemplated hereby. (b) Authority of Holding. Holding has full corporate power and authority to execute, deliver and perform its obligations under this Agreement and each of the Ancillary Agreements and to effectuate the Transfers and consummate the Distribution. The execution, delivery and performance of this Agreement and each of the Ancillary Agreements and the consummation of the Transfers and the Distribution has been duly and validly authorized by the Board of Directors of Holding, and no other corporate proceedings on the part of Holding are necessary to consummate or authorize any of the Ancillary Agreements or to effectuate the Transfers and consummate the Distribution. Each of this Agreement and the Ancillary Agreements has been duly and validly executed and delivered by Holding and constitutes valid and binding agreements of Holding, enforceable against Holding in accordance with their respective terms. (c) No Consent. No filing or registration with, or permit, authorization, consent or approval of, or notification or disclosure (collectively, "Governmental Consents") to, any United States (federal, state or local) or foreign government, or governmental, regulatory or administrative authority, agency or commission, court or other body or any arbitral tribunal (each, a "Governmental Authority") or any other third party (collectively, "Consents") is required in connection with the execution, delivery and performance by Holding of this Agreement or any of the Ancillary Agreements or the consummation by Holding of the Transfers and the Distribution, except (i) the filing of the Form 10 under the Exchange Act and the effectiveness thereof under the Exchange Act, (ii) such consents, approvals, orders, permits, authorizations, registrations, declarations and filings as may be required under the Blue Sky laws of various states, (iii) the listing on the New York Stock Exchange of the Holding Common Stock in connection with the Distribution and (iv) as set forth in Schedule 5.01(c) hereof. (d) No Violation. Assuming that all Consents have been duly made or obtained as contemplated by Section 5.01(c), the execution, delivery and performance by Holding of this Agreement and the Ancillary Agreements and the consummation of the Transfers and the Distribution will not (i) violate any provision of the certificate of incorporation or bylaws of Holding, (ii) violate any statute, rule, regulation, order or decree of any Governmental Authority by which Holding or any of its assets may be bound or affected or (iii) result in a violation or breach of, or constitute (with or without due notice or lapse of time or both) a default (or give rise to any right of termination, cancellation, acceleration, redemption or repurchase) under, any of the terms, conditions or provisions of (x) any note, bond, mortgage, indenture or deed of trust relating to indebtedness for borrowed money or (y) any license, lease or other agreement, instrument or obligation to which Holding is a party or by which it or any of its assets may be bound or affected. B-9 (e) Capitalization of Holding. All issued and outstanding shares of capital stock of Holding are held by JEFG as of the date hereof and are duly authorized and validly issued, fully paid, nonassessable and free of preemptive rights and respect thereto. Other than this Agreement and the transactions contemplated thereby and the awards contemplated by the Benefits Agreement or the Joint Proxy/Information Statement, there are no options, warrants, calls, subscriptions, or other rights, agreements or commitments obligating Holding to issue, transfer or sell any shares of capital stock of Holding or any other securities convertible into or evidencing the right to subscribe for any such shares. Prior to the date hereof, there has not been any issuance of capital stock of Holding other than to JEFG. ARTICLE VI INDEMNIFICATION PROCEDURES; CONTRIBUTION Section 6.01. NOTICE AND PAYMENT OF CLAIMS. If any ITGI or Holding Indemnitee (the "INDEMNIFIED PARTY") determines that it is or may be entitled to indemnification by a party (the "INDEMNIFYING PARTY") under Article IV (other than in connection with any Action or claim subject to Section 6.02), the Indemnified Party shall deliver to the Indemnifying Party a written notice specifying, to the extent reasonably practicable, the basis for its claim for indemnification and the amount for which the Indemnified Party reasonably believes it is entitled to be indemnified. After the Indemnifying Party shall have been notified of the amount for which the Indemnified Party seeks indemnification, the Indemnifying Party shall, within 90 days after receipt of such notice, pay the Indemnified Party such amount in cash or other immediately available funds (or reach agreement with the Indemnified Party as to a mutually agreeable alternative payment schedule) unless the Indemnifying Party objects to the claim for indemnification or the amount thereof. If the Indemnifying Party does not give the Indemnified Party written notice objecting to such claim and setting forth the grounds therefor within the same 90 day period, the Indemnifying Party shall be deemed to have acknowledged its liability for such claim and the Indemnified Party may exercise any and all of its rights under applicable law to collect such amount. Section 6.02. NOTICE AND DEFENSE OF THIRD-PARTY CLAIMS. Promptly following the earlier of (a) receipt of notice of the commencement by a third party of any Action against or otherwise involving any Indemnified Party or (b) receipt of information from a third party alleging the existence of a claim against an Indemnified Party, in either case, with respect to which indemnification may be sought pursuant to this Agreement (a "THIRD-PARTY CLAIM"), the Indemnified Party shall give the Indemnifying Party written notice thereof. The failure of the Indemnified Party to give notice as provided in this Section 6.02 shall not relieve the Indemnifying Party of its obligations under this Agreement, except to the extent that the Indemnifying Party is materially prejudiced by such failure to give notice. Within 90 days after receipt of such notice, the Indemnifying Party may by giving written notice thereof to the Indemnified Party, (a) acknowledge, as between the parties hereto, responsibility for, and at its option, elect to assume the defense of such Third-Party Claim at its sole cost and expense or (b) object to the claim of indemnification set forth in the notice delivered by the Indemnified Party pursuant to the first sentence of this Section 6.02; PROVIDED that if the Indemnifying Party does not within the same 90 day period give the Indemnified Party written notice objecting to such claim and setting forth the grounds therefor or electing to assume the defense, the Indemnifying Party shall be deemed to have acknowledged, as between the parties hereto, its responsibility for such Third-Party Claim. Any contest of a Third Party Claim as to which the Indemnifying Party has elected to assume the defense shall be conducted by attorneys employed by the Indemnifying Party and reasonably satisfactory to the Indemnified Party; PROVIDED that the Indemnified Party shall have the right to participate in such proceedings and to be represented by attorneys of its own choosing at the Indemnified Party's sole cost and expense. Notwithstanding the foregoing, (i) the Indemnifying Party shall not be entitled to assume the defense of any Third-Party Claim (and shall be liable to the Indemnified Party for the reasonable B-10 fees and expenses incurred by the Indemnified Party in defending such Third-Party Claim) if there are one or more legal defenses available only to the Indemnified Party that conflict, in one or more significant substantive respects, with those available to the Indemnifying Party with respect to such Third-Party Claim and (ii) if at any time after assuming the defense of a Third-Party Claim an Indemnifying Party shall fail to prosecute or shall withdraw from the defense of such Third-Party Claim, the Indemnified Party shall be entitled to resume the defense thereof with counsel selected by such Indemnified Party and the Indemnifying Party shall be liable for the reasonable fees and expenses of counsel incurred by the Indemnified Party in such defense. The Indemnifying Party may settle, compromise or discharge a Third-Party Claim, provided, the Indemnifying Party shall have obtained the prior written consent of the Indemnified Party, which consent shall not be unreasonably withheld. If, after receipt of notice of a Third-Party Claim, the Indemnifying Party does not undertake to defend such Third-Party Claim within 90 days of such notice, the Indemnified Party may, but shall have no obligation to, contest any lawsuit or action with respect to such Third-Party Claim and the Indemnifying Party shall be bound by the results obtained with respect thereto by the Indemnified Party. Indemnification shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Indemnifiable Loss is incurred. The parties agree to render to each other such assistance as may reasonably be requested in order to ensure the proper and adequate defense of any Third-Party Claim. The remedies provided in this Article VI shall be cumulative and shall not preclude assertion by any Indemnified Party of any other rights or the seeking of any and all other remedies against any Indemnifying Party. Section 6.03. CONTRIBUTION. To the extent that any indemnification provided for in Section 4.01 or 4.02 is unavailable to an Indemnified Party or is insufficient in respect of any of the Indemnifiable Losses of such Indemnified Party, then the Indemnifying Party, in lieu of, or in addition to, indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Indemnifiable Losses (i) in such proportion as is appropriate to reflect the relative benefits received by such Indemnifying Party on the one hand and the Indemnified Party on the other hand from the transaction or other matter which resulted in the Indemnifiable Losses or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other hand in connection with the action, inaction, statements or omissions that resulted from such Indemnifiable Losses as well as any other relevant equitable considerations. ARTICLE VII EMPLOYEE MATTERS Section 7.01. BENEFITS AGREEMENT. All matters relating to or arising out of any employee benefit, compensation or welfare arrangement in respect of any present and former employee of the ITGI Group or the Holding Group shall be governed by the Benefits Agreement, except as may be expressly stated herein. In the event of any inconsistency between the Benefits Agreement and this Agreement, the Benefits Agreement shall govern. ARTICLE VIII TAX MATTERS All matters relating to Taxes shall be governed exclusively by the Tax Agreement, except as may be expressly stated herein. In the event of any inconsistency between the Tax Agreement and this Agreement, the Tax Agreement shall govern. B-11 ARTICLE IX ACCOUNTING MATTERS Section 9.01. ACCOUNTING TREATMENT OF ASSETS TRANSFERRED. All transfers of Assets of JEFG to JEFCO or Holding pursuant to this Agreement shall constitute contributions by JEFG to the capital of JEFCO or Holding, as appropriate. ARTICLE X INFORMATION Section 10.01. PROVISION OF CORPORATE RECORDS. ITGI (as successor to JEFG pursuant to the Merger) and Holding shall arrange as soon as practicable following the Effective Time for the provision to the other of copies of any requested corporate documents (e.g. minute books, stock registers, stock certificates, documents of title, contracts, etc.) in its possession relating to the other or its business and affairs; provided, however, this Section 10.01 shall not create any obligation to retain documents beyond that which is required pursuant to such entity's records retention policies. JEFG and Holding agree that Holding shall retain control and custody of original copies of all corporate documents of JEFG relating to matters and events on or prior to the Effective Time. Section 10.02. ACCESS TO INFORMATION. From and after the Effective Time, ITGI (as successor to JEFG pursuant to the Merger) and Holding shall each afford the other and its accountants, counsel and other designated representatives reasonable access (including using reasonable efforts to give access to persons or firms possessing information) and duplicating rights during normal business hours to all records, books, contacts, instruments, computer data and other data and information in its possession relating to the business and affairs of the other, insofar as such access is reasonably required by the other including, without limitation, for audit, accounting and litigation purposes. Section 10.03. LITIGATION COOPERATION. ITGI (as successor to JEFG pursuant to the Merger) and Holding shall each use reasonable efforts to make available to the other, upon written request, its officers, directors, employees and agents as witnesses to the extent that such persons may reasonably be required in connection with any legal, administrative or other proceedings arising out of the business of the other prior to the Effective Time in which the requesting party may from time to time be involved. Section 10.04. REIMBURSEMENT. ITGI (as successor to JEFG pursuant to the Merger) and Holding, each providing copies of documents, information or witnesses under Sections 10.01, 10.02 or 10.03 to the other, shall be entitled to receive from the recipient, upon the presentation of invoices therefor, payment for all reasonable out-of-pocket costs and expenses as may be reasonably incurred in providing such information or witnesses. Section 10.05. RETENTION OF RECORDS. Except as otherwise required by law or agreed to in writing, each party shall, and shall cause the members of its Group to, retain all information relating to the other's business in accordance with the past practice of such party. Notwithstanding the foregoing, except as otherwise provided in the Tax Agreement, either party may destroy or otherwise dispose of any information at any time following the first anniversary of the Merger in accordance with the corporate record retention policy maintained by such party with respect to its own records. Section 10.06. CONFIDENTIALITY. Each party shall, and shall cause each member of its Group to, hold and cause its directors, officers, employees, agents, consultants and advisors to hold, in strict confidence all information concerning the other party (except to the extent that such information can be shown to have been (a) in the public domain through no fault of such party or (b) later lawfully acquired after the Distribution on a non-confidential basis from other sources not subject to a confidentiality obligation by the party to which it was furnished), and neither party shall release or disclose such information to any other person, except its auditors, attorneys, financial advisors, bankers and other B-12 consultants and advisors who shall be advised of and agree in writing to comply with the provisions of this Section 10.06. In the event that a party (the "RECEIVING PERSON") is requested pursuant to, or required by, applicable law, regulation, rule or by legal process to disclose any information regarding the other party (the "DISCLOSING PERSON"), the Receiving Person agrees that it will provide the Disclosing Person with prompt notice of such request or requirement in order to enable the Disclosing Person to seek an appropriate protective order or other remedy, to consult with the Receiving Person with respect to the Disclosing Person taking steps to resist or narrow the scope of such request or requirement, or to waive compliance, in whole or in part, with the terms of this Section 10.06. In any such event, the Receiving Person will disclose only that portion of any information regarding the Disclosing Party which the Receiving Person is advised by counsel is legally required and will use its reasonable best efforts to ensure that all such information that is so disclosed will be accorded confidential treatment. ARTICLE XI INTEREST ON PAYMENTS Except as otherwise expressly provided in this Agreement, all payments by one party to the other under this Agreement, any Intercompany Agreement or any Ancillary Agreement shall be paid, by wire transfer of immediately available funds to an account in the United States designated by the recipient, within 30 days after receipt of an invoice or other written request for payment setting forth the specific amount due and a description of the basis therefor in reasonable detail. Any amount remaining unpaid beyond its due date, including disputed amounts that are ultimately determined to be payable, shall bear interest at a floating rate of interest equal to 2.5% over the higher of the Federal funds rate or the London Interbank Offered Rate. ARTICLE XII MISCELLANEOUS Section 12.01. EXPENSES. The obligations of JEFG and ITGI under Section 7(d) ("Expenses") of the Merger Agreement shall survive (i) any termination of the Merger Agreement and (ii) the Effective Time of the Merger, with (x) Holding succeeding to the obligations of, and being credited for any Expense payments made prior to the Effective Time by, JEFG thereunder and (y) ITGI (as the successor to JEFG following the Merger) succeeding to the obligations of, and being credited for any Expense payments made by, ITGI thereunder. Section 12.02. NOTICES. All notices and communications under this Agreement after the Distribution Date shall be in writing and any communication or delivery hereunder shall be deemed to have been duly given when received addressed as follows: If to JEFG or any of its successors, to: Investment Technology Group, Inc. 380 Madison Avenue, 4th Floor New York, New York 10017 Attention: Chief Financial Officer With a copy to: Cahill Gordon & Reindel 80 Pine Street New York, New York 10005 Attention: Immanuel Kohn, Esq. B-13 If to Holding, to: Jefferies Group, Inc. JEF Holding Company, Inc. 11100 Santa Monica Boulevard, 11th Floor Los Angeles, California 90025 Attention: Chief Financial Officer With a copy to: Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, PA 19103 Attention: Brian J. Lynch, Esq. Such notices shall be deemed received (i) as of the date of delivery by hand delivery, (ii) one business day after such notice is given to a national overnight delivery service or (iii) five business days after placed in the United States mail, provided such mail is sent by certified mail with return receipt requested. Either party may, by written notice so delivered to the other party, change the address to which delivery of any notice shall thereafter be made. Section 12.03. AMENDMENT AND WAIVER. This Agreement may not be altered or amended, nor may rights hereunder be waived, except by an instrument in writing executed by the party or parties to be charged with such amendment or waiver. No waiver of any terms, provision or condition of or failure to exercise or delay in exercising any rights or remedies under this Agreement, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, provision, condition, right or remedy or as a waiver of any other term, provision or condition of this Agreement. Section 12.04. ENTIRE AGREEMENT. This Agreement, together with the Merger Agreement and the Ancillary Agreements, constitutes the entire understanding of the parties hereto with respect to the subject matter hereof, superseding all negotiations, prior discussions and prior agreements and understandings relating to such subject matter. To the extent that the provisions of this Agreement are inconsistent with the provisions of any Ancillary Agreement, the provisions of such Ancillary Agreement shall prevail. Section 12.05. PARTIES IN INTEREST. Neither of the parties hereto may assign its rights or delegate any of its duties under this Agreement without the prior written consent of each other party. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and their respective successors and permitted assigns. Nothing contained in this Agreement, express or implied, is intended to confer any benefits, rights or remedies under Articles IV, V and VI hereof upon any person or entity other than members of the ITGI Group and the Holding Group and the ITGI Indemnitees and the Holding Indemnitees and their respective successors and permitted assigns. Section 12.06. DISPUTES. (a) Resolution of any and all disputes arising from or in connection with this Agreement, whether based on contract, tort, statute or otherwise, including, but not limited to, disputes in connection with claims by third parties (collectively, "DISPUTES"), shall be subject to the provisions of this Section 12.06; provided, however, that nothing contained herein shall preclude either party from seeking or obtaining (i) injunctive relief or (ii) equitable or other judicial relief to enforce the provisions hereof or to preserve the status quo pending resolution of Disputes hereunder. (b) Either party may give the other party written notice of any Dispute not resolved in the normal course of business. The parties shall thereupon attempt in good faith to resolve any Dispute promptly by negotiation between executives who have authority to settle the controversy and who are at a higher B-14 level of management than the persons with direct responsibility for administration of this Agreement. Within 20 days after delivery of the notice, the receiving party shall submit to the other a written response. The notice and the response shall include a statement of such party's position and a summary of arguments supporting that position and the name and title of the executive who will represent that party and of any other person who will accompany such executive. Within 45 days after delivery of the first notice, the executives of both parties shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to attempt to resolve the Dispute. All reasonable requests for information made by one party to the other will be honored. (c) If the Dispute has not been resolved by negotiation within 60 days of the first party's notice, or if the parties failed to meet within 45 days, the parties shall endeavor to settle the Dispute by mediation under the then current Commercial Mediation Rules of the American Arbitration Association. (d) If the Dispute has not been resolved within 180 days after delivery of the first notice under Section 12.06(b), either party may commence any litigation or other procedure allowed by law. Section 12.07. SURVIVAL. The rights and obligations under this Agreement shall survive the Distribution and Merger and any sale or other transfer by any member of Holding Group and/or the ITGI Group or any assignment or sale by them of any Assets or Liabilities. Section 12.08. SEVERABILITY. The provisions of this Agreement are severable and should any provision hereof be void, voidable or unenforceable under any applicable law, such provision shall not affect or invalidate any other provision of this Agreement, which shall continue to govern the relative rights and duties of the parties as though such void, voidable or unenforceable provision were not a part hereof. Section 12.09. GOVERNING LAW. This Agreement shall be construed in accordance with, and governed by, the laws of the State of New York, without regard to the conflicts of law rules of such state. Section 12.10. COUNTERPARTS. This Agreement may be executed in one or more counterparts each of which shall be deemed an original instrument, but all of which together shall constitute but one and the same Agreement. B-15 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. JEFFERIES GROUP, INC. By /s/ CLARENCE T. SCHMITZ ----------------------------------------- Name: Clarence T. Schmitz Title: Executive Vice President and CFO JEF HOLDING COMPANY, INC. By /s/ JERRY M. GLUCK ----------------------------------------- Name: Jerry M. Gluck Title: Secretary and General Counsel
B-16 EX-10.1-4 4 EXHIBIT 10.1.4 EXHIBIT 10.1.4 JOINT VENTURE AGREEMENT BY AND AMONG ITG INTERNATIONAL LIMITED, SOCIETE GENERALE, INVESTMENT TECHNOLOGY GROUP SG LIMITED, INVESTMENT TECHNOLOGY GROUP LIMITED, AND INVESTMENT TECHNOLOGY GROUP EUROPE LIMITED DATED AS OF NOVEMBER 17, 1998 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- TABLE OF CONTENTS
Page ARTICLE 1 DEFINITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 1.2 Additional Definitions . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 1.3 Interpretation and Construction of This Agreement. . . . . . . . . . . . . . 13 ARTICLE 2 FORMATION AND OFFICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.1 Formation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 2.2 Principal Executive Offices and Other Offices. . . . . . . . . . . . . . . . 14 2.3 Purpose of Joint Venture . . . . . . . . . . . . . . . . . . . . . . . . . . 14 ARTICLE 3 CAPITALIZATION OF THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3.1 Authorized Capital; Initial Subscriptions. . . . . . . . . . . . . . . . . . 15 3.2 Contributions to the Company . . . . . . . . . . . . . . . . . . . . . . . . 15 3.3 Initial Capital Contributions of the Venturers . . . . . . . . . . . . . . . 15 3.4 Additional Capital Contributions of the Venturers. . . . . . . . . . . . . . 16 3.5 Failure to Make Additional Capital Contributions . . . . . . . . . . . . . . 17 3.6 Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.7 Pre-emptive Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18 3.8 Distributions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 3.9 Business Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 3.10 Preparation of Approved Annual Budget. . . . . . . . . . . . . . . . . . . . 20 3.11 Approved Annual Budget for Initial Financial Year. . . . . . . . . . . . . . 21 ARTICLE 4 OPERATIVE AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 4.1 Operative Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF VENTURERS. . . . . . . . . . . . . . . . . . . . . . 21 5.1 Representations and Warranties of ITGI . . . . . . . . . . . . . . . . . . . 21 5.2 Representations and Warranties of SG . . . . . . . . . . . . . . . . . . . . 23 ARTICLE 6 CERTAIN COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.1 Further Assurances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 6.2 Commitment of Venturers to the Joint Venture . . . . . . . . . . . . . . . . 25 6.3 Effect of Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . 25 6.4 Notice of Venturer Change of Control . . . . . . . . . . . . . . . . . . . . 25 6.5 Election to Treat Companies as Partnerships. . . . . . . . . . . . . . . . . 25 ARTICLE 7 MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 7.1 Composition of the Boards. . . . . . . . . . . . . . . . . . . . . . . . . . 25 7.2 Responsibilities of the Company Board. . . . . . . . . . . . . . . . . . . . 26 7.3 Certain Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 7.4 Language . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.5 Officers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.6 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 7.7 Management of Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . 30 ARTICLE 8 COMMITTEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 8.1 Composition and Responsibilities of the Founders Committee . . . . . . . . . 30 8.2 Composition and Responsibilities of the Executive Committee. . . . . . . . . 31 8.3 Composition and Responsibilities of the Management Committee . . . . . . . . 32 8.4 Composition and Responsibilities of the Compensation and Audit Committee . . 33 ARTICLE 9 GOVERNANCE PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 9.1 Meetings; Quorum; Notice . . . . . . . . . . . . . . . . . . . . . . . . . . 33 9.2 Removal; Resignation; Vacancies. . . . . . . . . . . . . . . . . . . . . . . 35 9.3 No Remuneration. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 ARTICLE 10 INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 10.1 Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 ARTICLE 11 DEADLOCKS 38 11.1 Deadlocks. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38 ARTICLE 12 TRANSFERS OF VENTURE INTERESTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 12.1 General Restrictions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 12.2 Permitted Transferees. . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 12.3 Right of First Refusal.. . . . . . . . . . . . . . . . . . . . . . . . . . . 41 12.4 Venturer Change of Control . . . . . . . . . . . . . . . . . . . . . . . . . 43 12.5 Governmental Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . 43 12.6 Closing of Purchase of Venture Interests . . . . . . . . . . . . . . . . . . 43 ARTICLE 13 FINANCIAL AND ACCOUNTING MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 13.1 Books and Records; Financial Year. . . . . . . . . . . . . . . . . . . . . . 44 13.2 Financial Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 13.3 Right of Inspection of Books . . . . . . . . . . . . . . . . . . . . . . . . 45 13.4 Accounting Principles. . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 13.5 Auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 ARTICLE 14 OTHER ACTIVITIES BY THE VENTURERS; EXPANSION OF TERRITORY; CONFIDENTIALITY. . . . . . . . . . . . . . . . . . . . . . . . 45 14.1 In General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 14.2 Non-Competition Obligations. . . . . . . . . . . . . . . . . . . . . . . . . 46 14.3 Non-Competition Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . 46 14.4 Expansion of Territory . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 14.5 Confidentiality. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 ARTICLE 15 TERM AND TERMINATION DEFAULT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 15.1 Term of JV Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 15.2 Termination of Joint Venture . . . . . . . . . . . . . . . . . . . . . . . . 48 15.3 Termination Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 15.4 Termination Upon Default, Etc. . . . . . . . . . . . . . . . . . . . . . . . 49 15.5 Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 15.6 Termination by Dissolution . . . . . . . . . . . . . . . . . . . . . . . . . 50 ARTICLE 16 POST TERMINATION PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 16.1 Consequences of Termination. . . . . . . . . . . . . . . . . . . . . . . . . 50 16.2 Non-Solicitation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 16.3 Transition Plan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51 ARTICLE 17 NEGOTIATIONS; ARBITRATION; SUBMISSION TO JURISDICTION. . . . . . . . . . . . . . . . . 52 17.1 Negotiations; Arbitration. . . . . . . . . . . . . . . . . . . . . . . . . . 52 ARTICLE 18 MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 18.1 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 18.2 Applicable Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55 18.3 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 18.4 Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 18.5 Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 18.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 18.7 Entire Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 18.8 No Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 18.9 No Third-Party Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . . 57 18.10 Publicity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 18.11 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 18.12 Disclaimer of Agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 18.13 Relationship of the Parties. . . . . . . . . . . . . . . . . . . . . . . . . 57 18.14 Fiduciary Duties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
EXHIBITS Exhibit A - Clearing Agreement Exhibits B, C and D - Employment Agreements Exhibit E - ITG License Agreement Exhibit F - POSIT License Agreement Exhibit G - Service Agreement SCHEDULES Schedule 1.1 - Reference Value Schedule 3.1 - Loans Schedule 3.9 - Business Plan Schedule 7.5 - List of Officers JOINT VENTURE AGREEMENT JOINT VENTURE AGREEMENT (this "Agreement"), is made and entered into as of this 17th day of November, 1998 by and among ITG International Limited, a company organized under the laws of Ireland ("ITGI"), Societe Generale, a company organized under the laws of France ("SG"; and together with ITGI, sometimes referred to herein collectively as the "Venturers" and individually as a "Venturer"), Investment Technology Group SG Limited, a company organized under the laws of Ireland (the "Company"), Investment Technology Group Limited, a company organized under the laws of Ireland ("ITGL"), and Investment Technology Group Europe Limited, a company organized under the laws of Ireland ("ITGE"; and together with the Venturers, the Company and ITGL, sometimes referred to herein collectively, as the "Parties" and individually as a "Party"). W I T N E S E T H WHEREAS, certain affiliates of ITGI operate brokerage businesses primarily in the United States and co-own and have co-developed an electronic trading system commonly referred to as "POSIT" or "Portfolio System for Institutional Traders," used by financial institutions and other brokerage customers outside of European markets and comprised of a core system to which such customers submit, directly and confidentially, buy and sell orders and related systems for matching such orders and executing residual trades (collectively, the "POSIT System"); WHEREAS, SG and certain of its affiliates operate brokerage and banking businesses throughout Europe and have access to various institutional brokerage customers who may potentially be interested in utilizing a POSIT System developed to match buy and sell orders in European equity securities (hereinafter referred to, as "EuroPOSIT"); WHEREAS, it is anticipated that with the advent of the European Monetary Union many European markets will in the near future become, or be viewed as, a single European market and the Venturers share an objective of establishing EuroPOSIT as a recognized brokerage service within such single European market; WHEREAS, the Venturers have heretofore formed the JV Companies for the purpose of developing and exploiting EuroPOSIT for use in such European market; and WHEREAS, in connection therewith, the Venturers desire to make certain contributions to the Company of working capital, to provide for the management of the Company and for certain restrictions on the transferability of their respective Equity Interests in the Company, among other things, all in furtherance of the objectives set forth above and subject to the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing premises and the mutual agreements contained herein, the Parties hereto, intending to be legally bound, hereby agree as follows: ARTICLE 1 DEFINITIONS 1.1 DEFINITIONS. As used herein, the following terms shall have the following meanings, unless the context otherwise requires: "Affiliate" shall mean, with respect to any Person, any other Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by, or is under common Control with, such Person. The JV Companies shall not be deemed Affiliates of the Venturers or their Affiliates for purposes of this Agreement. "Agreement" shall mean this Joint Venture Agreement made between ITGI, SG, the Company, ITGL and ITGE, as same may be amended from time to time. "Americas" shall mean North America, South America and Central America and the countries, territories and possessions located in the Caribbean region. "Applicable Law" shall mean all applicable provisions of all (i) constitutions, treaties, statutes, laws (including common law), rules, regulations, ordinances or codes of any Governmental Authority, and (ii) orders, decisions, injunctions, judgments, awards and decrees of any Governmental Authority. "Applicable Rate" shall mean, during any period during which interest is due and payable, the rate of interest per annum then being charged with respect to the then outstanding Senior Debt of the Company; PROVIDED, HOWEVER, if no such Senior Debt is then outstanding, "Applicable Rate" shall mean, (i) in the case of a Reference Value calculation, the then current sterling one-year London Inter-bank Offered Rate and (ii) in all other cases, the then current sterling one-month London Inter-bank Offered Rate. "Approval" shall mean any consent, approval, license, permit or authorization. "Authorized Investments" shall mean, at any time, (i) any time deposit, certificate of deposit or bankers acceptance, maturing not more than one year after such time, maintained with or issued or guaranteed by either (a) a commercial banking institution (including U.S. branches of foreign banking institutions) that is a member of the Federal Reserve System and has assets of not less than $1,000,000,000, or (b) a European Union commercial banking institution with assets of not less than $1,000,000,000, (ii) exchequer bills, government gilts and other U.S. or European Union government or local authority guaranteed securities, maturing not more than one year after such time or (iii) commercial paper, maturing not more than nine months after the date of issue, which is issued by a corporation (other than an Affiliate of a Venturer) organized under the laws of any state of the United States, the District of Columbia or any country in the European Union and rated at least AAA by Standard & Poor's or the equivalent rating by Moody's rating services; PROVIDED, HOWEVER, an Authorized Investment must be denominated in the Euro, Pounds Sterling or the U.S. Dollar. "Bankruptcy" shall mean, with respect to any Person, (i) the commencement, under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, appointment of examiner, dissolution, insolvency or liquidation or similar Applicable Law of any jurisdiction, whether now or hereafter in effect, by such Person of a case or proceeding seeking (A) the entry as to such Person of an order of relief, (B) such Person's own bankruptcy, liquidation, reorganization, rehabilitation or composition or adjustment of debts, or (C) a suspension or moratorium of payments, (ii) the commencement against such Person of any case or proceeding of the type described in clause (i) of this definition which remains undismissed for a period of 30 days; (iii) the appointment of a custodian, trustee, administrator or similar official under any Applicable Law described in clause (i) of this definition with respect to such Person, or the taking charge by such custodian, trustee, administrator or similar official, of all or any substantial part of the property of such Person; (iv) any adjudication that such Person is insolvent or bankrupt; (v) the entering of any order of relief in, or other order approving, any case or proceeding of the type described in clause (i) of this definition; (vi) the making by such Person of a general assignment for the benefit of its creditors; (vii) the failure by such Person to pay, or the statement by such Person that it is unable to pay or shall be unable or deemed unable to pay its debts generally as they become due under Applicable Law; (viii) the calling by such Person of a meeting of its creditors with a view to arranging a composition or adjustment of its debts; or (ix) any indication by such Person, either by an act or failure to act, of its consent to, approval of or acquiescence in any of the actions, orders or events described in the foregoing clauses of this definition. "BARRA" shall mean BARRA Inc., a company organized under the laws of the State of California, U.S.A. "Business Day" shall mean any day on which commercial banks in each of the cities of New York, New York, London, England, Dublin, Ireland and Paris, France are normally open for the conduct of commercial banking business. "Business Plan" shall mean the Business Plan referred to in Section 3.9 and implemented as provided herein. "Clearing Agreement" shall mean the Clearing Agreement dated as of July 3, 1998 between ITGL and Pershing Limited, a true and correct copy of which is attached hereto as EXHIBIT A. "Committees" shall mean, collectively, the Audit Committee and the Compensation Committee and such other committee or sub-committee as may be formed from time to time by any of the JV Boards. "Competing Services" shall mean, (i) the JV Business described in clause (a) of Section 2.3 and (ii) any services substantially similar to such JV Business, PROVIDED, HOWEVER, nothing herein shall preclude either of the Venturers from conducting any business activity which is being conducted by it on the date of this Agreement, or is derived from the business activity being conducted by it on the date of this Agreement and is not substantially similar to such JV Business. "Constituent Documents" shall mean the charters, bylaws, memorandum or articles of association, or such other similar documents as may be required or otherwise entered into in connection with the formation of the JV Companies pursuant to Section 2.1(a). "Contract" shall mean any loan or credit agreement, note, bond, indenture, mortgage, deed of trust, lease, franchise, contract, or other agreement, obligation, instrument or binding commitment of any nature. "Control" (including, with its correlative meanings, "Controlled by" and "under common Control with") shall mean, with respect to any Person, any of the following: (i) ownership, directly or indirectly, by such Person of equity securities entitling it to exercise in the aggregate more than fifty percent (50%) of the voting power of the Equity Share Capital of the entity in question, or (ii) the possession by such Person of the power, directly or indirectly, (A) to elect a majority of the board of directors (or equivalent governing body) of the entity in question; or (B) to direct or cause the direction of the management and policies of or with respect to the entity in question, whether through ownership of securities, by Contract or otherwise. "Distribution" shall mean any distribution by the Company by means of any dividend payment, whether in cash, shares, other Equity Interests or otherwise, any payment or application of any of its assets to purchase, redeem or otherwise retire Equity Interests held by a Venturer, any distribution by way of reduction of capital, partial liquidation or otherwise in respect of any such Equity Interests held by such Venturer or any interest or other payment in respect of, or any repayment, repurchase or redemption of, Subordinated Debt of the Company or any Subsidiary of the Company held by or on behalf of a Venturer. "Employment Agreements" shall mean, collectively, the (i) Employment Agreement dated as of November 17, 1998 between ITGE and Alasdair Haynes, (ii) Employment Agreement dated as of November 17, 1998 between ITGL and Malcom Robertson and (iii) Employment Agreement dated as of November 17, 1998 between ITGE and Adrian Collins, true and correct copies of which are attached hereto as EXHIBITS B, C AND D, respectively. "Equity Interest" shall mean in relation to the JV Companies "Equity Share Capital" as such term is defined at Section 155 of the Irish Companies Act 1963, or any rights, entitlement or option to convert into, subscribe for or otherwise acquire any Equity Share Capital. "Equity Share Capital" in relation to the JV Companies shall have the meaning ascribed to such term at Clause 155 of the Irish Companies Act 1963. "Financial Year" shall mean the period commencing January 1 in any year and ending on December 31 in such year, except that the first Financial Year with respect to each JV Company formed pursuant to Article 2 hereof, shall commence on the date of its formation and end on December 31, 1999. "Governmental Approval" shall mean any consent, approval, authorization, waiver, grant, concession, license, exemption or order of, registration, certificate, declaration or filing with, or report or notice to, any Governmental Authority. "Governmental Authority" shall mean any federation, nation, state, sovereign or government, any federal, supranational, regional, state or local political subdivision, any governmental or administrative body, instrumentality, department or agency, any self regulatory organization (as defined by Section 8 of the Financial Services Act of 1986 of the United Kingdom) or any court, administrative hearing body, commission or other similar dispute resolving panel or body, and any other entity exercising executive, legislative, judicial, regulatory or administrative functions of a government to which any party hereto or any JV Company is subject. "Indebtedness" shall mean, without duplication, all (i) obligations for borrowed money or other extensions of credit, whether secured or unsecured and whether absolute or contingent, including, without limitation, unmatured reimbursement obligations with respect to letters of credit or guarantees issued on behalf of any Person and all obligations for the deferred purchase price of property, including finance leases and hire purchase agreements, (ii) obligations evidenced by bonds, notes, debentures or other similar instruments, (iii) obligations secured by any mortgage, pledge, security interest or other lien on property owned or acquired by the Company or its Subsidiaries, (iv) capital lease obligations, sale-leaseback or similar obligations and (v) all guarantees, endorsements or other contingent or surety obligations (other than endorsement of instruments for collection in the ordinary course of business) with respect to obligations of others, including, without limitation, any obligation to furnish funds, directly or indirectly (whether by virtue of partnership arrangements, commission agreements, or otherwise), through the purchase of goods, supplies or services or by way of Ordinary Shares purchase, capital contribution, advance or loan. "Injunction" shall mean any preliminary, temporary, interim or final injunction, temporary restraining order or other court ordered legal prohibition or equitable remedy requiring or prohibiting action. "Invest or Participate" (including, with its correlative meanings, "Investment or Participation", "Invested or Participated" and "Investing or Participating"), as it relates to a Party or any of its Affiliates, shall mean, with respect to any other Person that Offers Competing Services, directly or indirectly through an Affiliate, (a) to acquire, as a principal, partner, shareholder, beneficial owner or in any similar capacity, any ownership interest in such Person or (b) by contract or otherwise to manage, operate or finance such Person, or to participate in the management, operation or financing of such Person, or to act as agent, representative, consultant or in any similar capacity for such Person, or to use the name of such Person, or permit the use of the name of such Party or its Affiliate by such Person, to the extent that any of such activities described in this clause (b) are related to such Competing Services. "ITGI License Agreement" shall mean the ITGI License Agreement dated as of November 17, 1998 among ITGI and the Company, a true and correct copy of which is attached hereto as EXHIBIT E. "Irish GAAP" shall mean generally accepted accounting principles as in effect from time to time in Ireland. "Joint Venture" shall mean the JV Companies and the rights and obligations of the Parties and their Affiliates under this Agreement and the other Operative Agreements. "JV Boards" shall mean, collectively, the Company Board and the Boards of Directors of each Subsidiary of the Company. "JV Companies" shall mean, collectively, the Company, ITGL, ITGE and their respective Subsidiaries, if any, that may hereafter be formed. "Judgment" shall mean any judgment, order, judicial decree or arbitral award. "Major Competitor" shall mean a Person or any Affiliate of such Person which materially competes for business through a business substantially similar to that operated by the Joint Venture, or a Person which has taken substantial steps to become such a competitor. "Material Non-Monetary Default" shall mean a breach by a Venturer of any of the terms or provisions of Sections 14.2, 14.3 or 14.5 of this Agreement, which breach is not cured by such Venturer within thirty (30) days after written notice hereof is furnished to such Venturer by the other Venturer. "Non-Share Capital" shall mean Additional Capital Contributions made pursuant to Section 3.4 hereof which the Company has not determined to treat as either Equity Share Capital or Subordinated Debt. "Offer" (including, with its correlative meanings, "Offering" or "Offered") shall mean, with respect to electronic brokerage related products and services, directly or indirectly, offering, producing, providing, selling, promoting, distributing or marketing such product or service. "Operative Agreements" shall mean this Agreement, POSIT License Agreement, Service Agreements, Clearing Agreement, ITGI License Agreement and the Employment Agreements. "Party" or "Parties" shall have the respective meanings ascribed to such terms in the first paragraph hereof. "Percentage Interest" with respect to any Person's investment in another Person, shall mean such Person's equity interest therein (whether voting or non-voting) expressed as a percentage of the total outstanding Equity Share Capital of such other Person (whether voting or non-voting). "Permitted Affiliate" shall mean a Subsidiary of a Venturer, no minority interest in which is owned or held or the benefits of which are in any way enjoyed, directly or indirectly, by any Person engaged in a Competing Business. "Permitted Lien" shall mean: (i) materialmen=s, mechanics=, carriers=, workmen=s, repairmen=s or other like liens arising in the ordinary course of business for amounts not yet due or which are being contested in good faith by appropriate proceedings, (ii) liens for current taxes not yet due or any taxes being contested in good faith by appropriate proceedings, (iii) liens to secure performance of statutory obligations, (iv) any lien securing any purchase money indebtedness incurred in the ordinary course of business and (v) liens of lessors under Leases. "Person" shall mean an individual or a partnership, an association, a joint venture, a corporation, a business or a trust or other entity organized under any Applicable Law, an unincorporated organization or any Governmental Authority. "POSIT License Agreement" shall mean the POSIT License Agreement dated as of November 17, 1998 between POSIT JV, a California limited purpose partnership, and the Company, a true and correct copy of which is attached hereto as EXHIBIT H. "Proceeding" shall mean any action, litigation, suit, proceeding or formal investigation or review of any nature, civil, criminal, regulatory or otherwise, before any Governmental Authority. "Public Offering" shall mean (i) any BONA FIDE public offering of equity securities (or securities exchangeable for or convertible into equity securities) of the Company pursuant to an effective registration statement under the Securities Act or any other Applicable Law or any other offering which results in such securities being listed for trading on any national or provincial securities exchange in the Territory or the United States or included for trading in any national market system or otherwise available for trading on the Amsterdam Stock Exchange, the Brussels Stock Exchange, the London Stock Exchange, the Luxembourg Stock Exchange, EASDAQ or any other major international securities exchange, or (ii) any offer of equity securities (or securities exchangeable for or convertible into equity securities) of a Person made in reliance on Rule 144A under the Securities Act. "Reference Value" shall mean the Reference Value determined pursuant to the procedures set forth on SCHEDULE 1.1 attached hereto. "Schedule of Capital Calls" shall mean the Schedule of Capital Calls attached to the Business Plan as Appendix 19. "Securities Act" shall mean the United States Securities Act of 1933, or any similar United States Federal statute, and the rules and regulations of the U.S. Securities and Exchange Commission thereunder, all as the same shall be in effect from time to time. "Security Interest" shall mean any debenture, mortgage, pledge, security interest, adverse claim, encumbrance, lien (statutory or otherwise) or charge of any kind (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, the filing of or agreement to give any financing statement under the Uniform Commercial Code (or similar filing pursuant to Applicable Law of any jurisdiction) or any other type of preferential arrangement for the purpose, or having the effect, of protecting a creditor against loss or securing the payment or performance of any obligation. "Senior Debt" of any Person shall mean indebtedness of such Person ranking senior in right of payment and in liquidation to any other Indebtedness of such Person. "Service Agreements" shall mean, collectively, (i) Service Agreement to be dated as of November 17, 1998 among the JV Companies and ITG, (ii) Service Agreement to be dated as of November 17, 1998 among the JV Companies and SG, and (iii) Service Agreement dated as of October 6, 1998 between ITGL and ITGE, a true and correct copy of which is attached hereto as EXHIBIT G. "Stop Loss", in the case of any Venturer, shall mean Capital Calls in excess of the sum of: (i) the amount contributed by a Venturer pursuant to Section 3.3 and (ii) fifty percent (50%) of the maximum amount referred to in clause (i) of Section 3.4(a). "Subordinated Debt" of any Person shall mean Indebtedness of such Person ranking junior in right of payment and in liquidation to any other Indebtedness of such Person. "Subsidiary" shall mean, with respect to any Person (the "Parent"), any other Person in which the Parent, one or more direct or indirect Subsidiaries of the Parent, or the Parent and one or more if its direct or indirect Subsidiaries (i) have the ability, through ownership of securities individually or as a group, ordinarily, in the absence of contingencies, to elect a majority of the directors (or individuals performing similar functions) of such other Person, and (ii) own more than fifty percent (50%) of the Equity Share Capital. The JV Companies will not be deemed Subsidiaries of the Venturers or their Affiliates for purposes of this Agreement. "Territory" shall mean the countries of Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom and such other countries and territories thereof as the Venturers shall mutually agree in writing after the date hereof to add as a Territory pursuant to Section 14.4; PROVIDED, HOWEVER, that in no event shall the Americas, Japan, Australia, New Zealand or Canada be a Territory (collectively, the "Excluded Territories"). "Third Party Approval" shall mean the approval of any Person other than a Governmental Authority or a JV Company. "Transfer" shall mean any transfer, directly or indirectly, conditionally, contingently, voluntarily or involuntarily, whether or not for value, by operation of law or otherwise, including any sale, pledge, security interest or encumbrance, assignment, gift, merger, combination or other transaction or the entering into any agreement, arrangement, undertaking or action which results or may result in any of the foregoing. "Venture Interest", in the case of any Venturer, shall mean the Equity Interests in the Company held by the Venturer and any Subordinated Indebtedness owed by the Company to the Venturer. "Venturer Change of Control", with respect to a Venturer, shall mean the acquisition by any Person or group of Persons acting in concert, directly or indirectly, of equity securities of such Venturer (or such Venturer's Parent) entitling it or them to exercise in the aggregate thirty percent (30%) or more of the voting power of such Venturer (or such Venturer's Parent). "Venturer Subordinated Debt" shall mean Subordinated Debt of the Company owing to one of its Venturers that is subordinated to any other Indebtedness of the Company other than other Subordinated Debt of the Company owing to one of its Venturers. "Wholly-Owned" shall mean, when used to designate the ownership interest of any Person in an entity, that such Person owns directly or indirectly all of Equity Share Capital and voting power of such entity, other than any DE MINIMIS ownership in such entity as required by Applicable Law. 1.2 ADDITIONAL DEFINITIONS. Additional Capital Contributions Section 3.4 Approved Annual Budget Section 3.10 Audit Committee Section 8.4 Bona Fide Offer Section 12.3(a) Business Section 1.3 Capital Call Section 3.4(a) Capital Call Notice Section 3.4(b) Capital Call Period Section 3.4(b) Class A Voting Ordinary Shares Section 3.1 Class B Non-Voting Ordinary Shares Section 3.1 Company Affiliate Section 10.1(a) Company Board Section 7.1 Compensation Committee Section 8.4 Control Call Notice Date Section 12.4(b) Control Put Notice Date Section 12.4(a) Cure Period Section 3.5(a) Deadlock Section 11.1(b) Defaulting Venturer Section 3.5(a) Default Termination Value Section 15.4 Development Phase Schedule 1.1(a)(i) Distributable Cash Section 3.8 Executive Committee Section 8.2(a) Formative Phase Schedule 1.1(a)(ii) Founders Committee Section 8.1(a) Funding Breach Section 3.5(a) Funding Default Section 3.5(b) Initial Profit Year Section 3.8 ITGE Board Section 7.1(b) ITGL Board Section 7.1(b) JV Business Section 2.3 Listed Phase Schedule 1.1(a)(iii) Management Committee Section 8.3(a) Mature Phase Schedule 1.1(a)(iv) Non-Defaulting Venturer Section 3.5(b) Non-Transferring Party Section 12.6 Offeree Section 12.3(a) Offered Interest Section 12.3(a) Ordinary Shares Section 3.1 Profit Year Section 3.8 Proposed Transferee Section 12.3(a) Resolution Section 11.1(d) Resolution Call Notice Date Section 11.1(f) Resolution Put Notice Date Section 11.1(e) Seller Section 12.3(a) Senior Officers Section 17.1(a) Specified Court Section 17.1(d) Termination Conditions Section 15.2 Termination Notice Section 15.2 Third Party Arbitrator Section 11.1(d) Transferring Party Section 12.6 Transition Plan Section 16.3 Venturer Resolution Section 11.1(d) Written Offer Section 12.3(a) 1.3 INTERPRETATION AND CONSTRUCTION OF THIS AGREEMENT. The definitions in Section 1.1 and 1.2 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include," "includes" and "including" shall be deemed to be followed by the phrase "without limitation." All reference herein to Articles, Sections, Exhibits and Schedules shall be deemed to be references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. The table of contents and the headings of the Articles and Sections are inserted for convenience of reference only and are not intended to be a part of or to affect the meaning or interpretation of this Agreement. Unless the context shall otherwise require any reference to any agreement or other instrument or statute or regulation is to such agreement, instrument or statute or regulation as amended and supplemented from time to time (and, in the case of a statute or regulation, to any replacement provision). Any reference in this Agreement to a "day" or a number of "days" (without the explicit qualification of "Business") shall be interpreted as a reference to a calendar day or number of calendar days. If any action or notice is to be taken or given on or by a particular calendar day, and such calendar day is not a Business Day, then such action or notice shall be deferred until, or may be taken or given, on the next Business Day. In the event of a conflict between any provision of a Constituent Document and any provision of this Agreement, this Agreement shall prevail. ARTICLE 2 FORMATION AND OFFICES 2.1 FORMATION. (a) It is the Venturers' intent to operate the Joint Venture in a holding company structure with the business and operations of the Joint Venture to be conducted through ITGL and ITGE, and, accordingly, the Venturers have heretofore caused the formation of (i) the Company under the name "Investment Technology Group SG Limited" as a company under the laws of Ireland, (ii) ITGL under the name "Investment Technology Group Limited" as a company under the laws of Ireland and as the Wholly-Owned Subsidiary of the Company and (iii) ITGE under the name "Investment Technology Group Europe Limited" as a company under the laws of Ireland and as the Wholly-Owned Subsidiary of ITGL. From and after the date hereof, the Venturers shall take such action as may be necessary and appropriate so that the Constituent Documents shall incorporate the terms and conditions of this Agreement to the extent practicable and customary in the jurisdiction of formation of the Company and each of the other JV Companies. (b) Except as otherwise provided herein, each of the Venturers shall own fifty percent (50%) of the voting Equity Interests of the Company. 2.2 PRINCIPAL EXECUTIVE OFFICES AND OTHER OFFICES. It is the intention of the Venturers that the JV Companies maintain offices that are separate from the Venturers' respective offices, at such location or locations as the Company Board shall determine from time to time. The principal executive offices of ITGL and ITGE will initially be located at Dublin Exchange Facility, IFSC, 2nd Floor, Custom House Docks, Dublin 1, Ireland. The U.K. branch of ITGE will also initially maintain offices at River Plate House, 7-11 Finsbury Circus, London, England. The Company will be initially located at Wilmington Trust Company, Rodney Square North, 1100 North Market Street, Wilmington, Delaware 19890. 2.3 PURPOSE OF JOINT VENTURE. The sole purpose and the nature of the business (the "JV Business") to be conducted and promoted by the Joint Venture are (a) to develop and exploit EuroPOSIT in the Territory in accordance with the Operative Agreements, (b) to operate brokerage operations in the Territory, and (c) to engage in any and all activities necessary, advisable, convenient or incidental to the foregoing. Unless otherwise approved by the Venturers, the activities of the JV Companies shall be limited to the activities set forth in the Operative Agreements, Business Plan and the Constituent Documents and the JV Companies shall not conduct any other business operations whatsoever. ARTICLE 3 CAPITALIZATION OF THE COMPANY 3.1 AUTHORIZED CAPITAL; INITIAL SUBSCRIPTIONS. The Venturers shall cause the Constituent Documents of the Company to provide that (A)(i) the authorized Equity Share Capital of the Company shall consist of 50,000,000 Ordinary Shares of which 45,000,000 shares shall be designated Class A Voting Ordinary Shares (the "Class A Voting Ordinary Shares"), having one vote per share and (ii) 5,000,000 shares shall be designated Class B Non-Voting Ordinary Shares (the "Class B Non-Voting Ordinary Shares"; and together with the Class A Voting Ordinary Shares, the "Ordinary Shares"), having no voting rights and (B) no Ordinary Shares will entitle the holder thereof to any preferences upon Distributions by the Company by way of dividends or otherwise. It is the intention of the Venturers that the Class B Non-Voting Ordinary Shares will be reserved for issuance (i) to the Venturers upon the making of Additional Capital Contributions pursuant to Sections 3.4 and 3.5 and (ii) in connection with performance based incentive compensation for management and other personnel of the JV Companies. (b) As of the date hereof, ITG and SG have advanced certain sums to ITGL in the form of loans as set forth in Schedule 3.1. 3.2 CONTRIBUTIONS TO THE COMPANY. Except as otherwise expressly provided in this Agreement, no Venturer shall be required to make any contributions to the capital of the Companies or subscribe for additional shares of the equity securities of the JV Companies. 3.3 INITIAL CAPITAL CONTRIBUTIONS OF THE VENTURERS. On or prior to the November 30 1998, each Venturer shall have made initial capital contributions to the Company consisting of GBL2,900,000 in exchange for 50,000 Class A Voting Ordinary Shares and GBL2,850,000 Non-Share Capital. 3.4 ADDITIONAL CAPITAL CONTRIBUTIONS OF THE VENTURERS. (a) From and after the date hereof, the Company may require (each such requirement, a "Capital Call") each Venturer to make additional cash capital contributions ("Additional Capital Contributions") to the Company (i) of up to an aggregate of GBL2,100,000, in such increments and at such times as contemplated by the Schedule of Capital Calls, or as may otherwise be approved by the Company Board, and (ii) in such amounts and at such times as may be set forth in Approved Annual Budgets, it being understood that the Venturer's Additional Capital Contributions shall be made in GB Pounds Sterling by wire transfer of immediately available funds and, except as otherwise provided in Section 3.5, each Venturer's Additional Capital Contributions shall be made in equal amounts. (b) If the Company determines to make a Capital Call, the Company shall send to each Venturer a notice thereof (a "Capital Call Notice"), which shall set forth, among other things, (i) the amount of the Additional Capital Contribution to be made by each of the Venturers, (ii) the period (the "Capital Call Period") within which such Additional Capital Contribution shall be made, which period shall not end less than ten (10) Business Days after the date on which such Capital Call Notice is given, and (iii) its determination as to whether such Additional Capital Contribution will be in the form of Equity Share Capital, Non-Share Capital or Subordinated Debt. Upon receipt of Additional Capital Contributions in the form of Equity Share Capital from a Venturer, the Company shall issue to such Venturer shares of Class B Non-Voting Ordinary Shares based on the per share value of the Ordinary Shares as determined by the Company Board at the time of the Capital Call. Upon receipt of Additional Capital Contributions in the form of Subordinated Debt from a Venturer, the Company shall issue to such Venturer a promissory note evidencing such indebtedness having such terms and provisions (including maturity, interest rate and events of default) as determined by the Company Board at the time of the Capital Call. Any Additional Capital Contributions in the form of Non-Share Capital received from a Venturer shall be recorded in the books and records of the Company but the Company shall not issue any certificate or other instrument to such Venturer in respect thereof. 3.5 FAILURE TO MAKE ADDITIONAL CAPITAL CONTRIBUTIONS. (a) Following the expiration of a Capital Call Period, the Company shall promptly notify each Venturer of the failure by any Venturer (a "Defaulting Venturer") to make its respective Additional Capital Contribution pursuant to the Capital Call Notice (such failure to make an Additional Capital Contribution is referred to herein as a "Funding Breach"). The Defaulting Venturer shall have thirty (30) days (the "Cure Period") from the date of notice of the Funding Breach to cure such Funding Breach by delivering to the Company the Additional Capital Contribution required under the Capital Call Notice together with interest thereon calculated at the Applicable Rate from the date of the Funding Breach to and including the date of payment. If the Funding Breach is so cured, the Defaulting Venturer shall be entitled to receive, and the Company shall issue to the Defaulting Venturer, the Class B Non-Voting Shares, promissory note evidencing Subordinated Debt or credit on the Company's books and records for Non-share Capital to which the Defaulting Venturer would have otherwise been entitled to receive under Section 3.4(b) upon the making of the applicable Capital Call. (b) If a Defaulting Venturer shall fail to deliver its Additional Capital Contribution together with interest thereon as provided in Section 3.5(a) within the Cure Period, then a funding default (a "Funding Default") shall have occurred and all rights of the Defaulting Venturer to make an Additional Capital Contribution pursuant to such Capital Call shall cease and, for a period of ninety (90) days after the occurrence of the Funding Default, the non-defaulting Venturer (the "Non-Defaulting Venturer") shall have the option to provide all or any part of the Defaulting Venturer's Additional Capital Contribution to the Company without payment of any interest. Upon receipt of an Additional Capital Contribution pursuant to this Section 3.5(b) by a Non-Defaulting Venturer, the Non-Defaulting Venturer shall be entitled to receive, and the Company shall issue to the Non-Defaulting Venturer, a number of Class B Non-Voting Shares as would reflect the additional Equity Interest to which such Non-Defaulting Venturer would be entitled (with any excess of the amount contributed over the number of Class B Non-Voting Shares so issued to be credited to a share premium account). To the extent that the issuance of such shares results in any adjustment of the Percentage Interests, the governance rights of the Venturers under this Agreement shall not be affected. 3.6 LOANS. (a) Except as provided in Section 3.4 or 3.6(c), no Venturer shall be obligated to loan funds to any JV Company. Loans by a Venturer to the Company shall not be considered capital contributions. The amount of any such loans shall be a debt of the Company owed to such Venturer in accordance with the terms and conditions upon which such loans are made. (b) With the prior written consent of the other Venturer, a Venturer may (but shal not be obligated to) guarantee a loan made to the JV Companies. If a Venturer guarantees a loan made to any JV Company and it is required to make payment pursuant to such guarantee to the maker of the loan, then the amounts so paid to the maker of the loan shall be treated as a loan by such Venturer to the JV Company repayable on demand and not as an Additional Capital Contribution. In the event that only one of the Venturers provides such a guarantee, the other Venturer hereby agrees to indemnify the Venturer who provides such guarantee for fifty percent (50%) of any amounts paid under such guarantee and for fifty percent (50%) of any other costs, liabilities or expenses incurred in respect thereof. (c) It is the intention of the Venturers that the JV Companies be financed in a manner that enables the JV Companies to have a Debt to Equity ratio that enables them to fulfill any regulatory capital requirements imposed on the JV Business under the Applicable Laws of any Territory in which the JV Companies are conducting or intend to conduct JV Business. To the extent necessary to maintain such regulatory capital requirements, the Venturers may in their discretion loan such funds as may be necessary to the JV Companies, each Venturer shall participate in such loans on a PRO RATA basis based on its Percentage Interest at the time such loans are made and, as necessary, the Venturers shall enter into intercreditor agreements to ensure that such loans shall be subordinate in right of payment to any Senior Debt of the JV Companies from time to time. 3.7 PRE-EMPTIVE RIGHTS. The Company shall not issue any equity securities or any warrant, option or other security convertible into or exercisable for such equity securities of the Company (other than any issuance of shares of Class A Voting Ordinary Shares as described in Section 3.1(b) and any shares of Class B Non-Voting Ordinary Shares as contemplated by Sections 3.1(a), 3.4 and 3.5), or enter into any agreement in respect of such issuance, unless the issuance has been approved as required by this Agreement and pursuant to which the Company offers to each of the Venturers the right to participate proportionately according to the Percentage Interest of such Venturer, as of the date of such proposed issuance, on the same terms and conditions, unless otherwise approved by the Executive Committee. Any right granted pursuant to the preceding sentence shall be exercised by written notice to the Company given within thirty (30) days after delivery to each Venturer of written notice of such proposed issuance. If any Venturer fails to respond to the Company within the 30-day notice period, such failure shall be deemed to be the rejection of the right of such Venturer to participate in the purchase of the equity of the Company to be issued. At any time within ninety (90) days following the date the Company has received notice (or deemed rejection) from each Venturer accepting or rejecting its right to participate, the Company may carry out the proposed issuance. The provisions of this Section 3.7 shall not apply to an issuance of Equity Share Capital of the Company or any other Equity Interest in the Company, including without limitation any warrant, option or security convertible into or exercisable for such Equity Share Capital in connection with a Public Offering, an acquisition completed in the ordinary course of the JV Business or an employee benefit plan or incentive compensation plan. 3.8 DISTRIBUTIONS. Unless the Venturers mutually otherwise agree in writing to permit Distributions at an earlier time or on a different basis, the Venturers shall, and shall cause their representatives on the Company Board, to take all such action so that the Company shall not make any Distributions until such time as profits as accumulated since the formation of the Company are in excess of losses as accumulated since the formation of the Company as reflected in the annual consolidated financial statements prepared for the Company and the Subsidiaries for the Financial Year then ended (the first such Financial Year being hereinafter referred to as an "Initial Profit Year" and each such subsequent Financial Year being hereinafter referred to as a "Profit Year"). Thereupon, the Venturers shall cause their representatives on the Company Board, to take all such action so that "Distributable Cash" held by the Company, unless otherwise determined by the Company Board, shall be distributed as Distributions to the Venturers in accordance with their respective Percentage Interests at least semi-annually in respect of the preceding six-month period; PROVIDED, HOWEVER, that all fees then payable under the Service Agreements shall have been paid, as required thereunder prior to any Distribution to the Venturers pursuant to this Section. Unless otherwise approved by the Company Board, all Distributions to Venturers shall be in cash in GB Pounds Sterling. Distributable Cash shall mean seventy percent (70%) of the amount by which cash and cash equivalents (less the Company=s debt proceeds and contributions to capital, less, amounts specified in the Approved Annual Budget to serve as a source of funds for capital expenditures and, less, required amounts needed pursuant to Applicable Law to ensure that the Company has sufficient regulatory capital) as shown in the Company=s quarterly consolidated statement of cash flows as of the end of the relevant fiscal quarter exceeds the cash and cash equivalents as shown in the Company=s consolidated statement of cash flows as of the end of the preceding fiscal quarter (after taking into account any Distributions as of the end of such preceding fiscal quarter). The Company shall cause its Subsidiaries to make Distributions to the Company to the extent necessary to facilitate the making of Distributions by the Company as contemplated by this Section 3.8, subject to mandatory provisions of Applicable Law. In no event shall the Company or its Subsidiaries make Distributions in excess of amounts permitted under Applicable Law. 3.9 BUSINESS PLAN. In furtherance of the Joint Venture, the Venturers have established the Business Plan which sets forth the manner in which the JV Business is to be conducted by the JV Companies during the 5-year period beginning on the date hereof and embodies the overall business strategy for the Joint Venture until such time as it may be amended or modified upon the approval of the Company Board. A true and correct copy of the Business Plan on the date hereof is attached hereto as SCHEDULE 3.9. 3.10 PREPARATION OF APPROVED ANNUAL BUDGET. The Executive Committee shall prepare for presentation by the chief executive officer of the Company to the Company Board on or before October 31 in each year beginning October 31, 1999, an annual budget for the Company and its Subsidiaries setting forth in reasonable detail the proposed and projected operating revenues and expenses for the Company and its Subsidiaries for the year beginning the following January 1. Upon approval of such proposed annual budget by the Company Board (with such changes, if any, as the Company Board may determine), each annual budget shall constitute an "Approved Annual Budget" for purposes hereof. 3.11 APPROVED ANNUAL BUDGET FOR INITIAL FINANCIAL YEAR. Notwithstanding anything to the contrary contained in Section 3.10, a true and correct copy of the Approved Annual Budget for the initial Financial Year of the Company and its Subsidiaries is set out in the document attached at SCHEDULE 3.9. ARTICLE 4 OPERATIVE AGREEMENTS 4.1 OPERATIVE AGREEMENTS. On or prior to the date hereof, each of the Venturers has and has caused its Affiliates insofar as within its power, to enter into each of the following Operative Agreements, to which such Venturer or its Affiliates, as the case may be, are parties: (i) POSIT License Agreement; (ii) Service Agreements; (iii) Clearing Agreement; (iv) ITGI License Agreement; and (v) Employment Agreements. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF VENTURERS 5.1 REPRESENTATIONS AND WARRANTIES OF ITGI. ITGI represents and warrants to SG as follows: (a) ORGANIZATION AND STANDING. ITGI is a limited liability company validly incorporated and subsisting under the law of the jurisdiction of its incorporation and has all requisite corporate power and corporate authority necessary to enable it to own, lease or otherwise hold its properties and assets and to carry on its business as presently conducted. (b) DUE AUTHORIZATION. ITGI has all requisite corporate power and corporate authority to enter into and perform its obligations under this Agreement and to consummate the transactions to be consummated by it hereunder. ITGI has all requisite corporate power and corporate authority to enter into and perform its obligations under the other Operative Agreements to which it is a party and to consummate the transactions to be consummated thereby by it. The execution, delivery and performance by ITGI of the Operative Agreements to which it is a party have been duly authorized by all necessary corporate action on the part of ITGI. This Agreement has been, and the other Operative Agreements to which ITGI is a party have been, duly executed and delivered by it. This Agreement constitutes, and the other Operative Agreements to which ITGI is a party constitute, legal, valid and binding obligations of ITGI, enforceable against it in accordance with their respective terms, subject to the effect of any applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting creditors' rights generally and subject to the effect of general principles of equity, including, without limitation, the possible unavailability of specific performance or injunctive relief regardless of whether considered in a proceeding in equity or at law. (c) NO CONFLICTS. The execution, delivery and performance by ITGI of this Agreement does not, and the execution, delivery and performance by ITGI of the other Operative Agreements to which it is a party and the compliance with the terms of the Operative Agreements to which it is a party will not conflict with, result in any violation of or default (with or without notice or lapse of time or both) under, give rise to a right of termination, cancellation or acceleration of any obligation (in each case by any third party) or to the loss of any benefit under, or result in or require the creation, imposition or extension of any Security Interest upon any of its properties or assets under (i) any provision of its Certificate of Incorporation or by-laws or similar constituent documents, or (ii) any Judgment, Injunction, Applicable Law or Contract to which it is a party or by which it or any of its properties is bound. To the knowledge of ITGI, no Third Party Approval and no Governmental Approval is required to be obtained or made by ITGI in connection with the execution, delivery and performance of this Agreement, the other Operative Agreements to which it is a party, and the transactions contemplated hereby and thereby. (d) BROKERS OR FINDERS. No Person is or will be entitled to any broker's or finder's fee, or any other commission or similar fee in connection with any of the transactions contemplated hereby as a result of any action taken by or on behalf of ITGI. (e) LITIGATION. There is no Proceeding pending or, to the knowledge of ITGI, threatened against ITGI reasonably likely to restrain, enjoin or otherwise prevent the consummation of the transactions contemplated hereby. 5.2 REPRESENTATIONS AND WARRANTIES OF SG. SG represents and warrants to ITGI as follows: (a) ORGANIZATION AND STANDING. SG is a corporation duly organized, validly existing and in good standing under the law of the jurisdiction of its incorporation and has all requisite corporate power and corporate authority necessary to enable it to own, lease or otherwise hold its properties and assets and to carry on its business as presently conducted. (b) DUE AUTHORIZATION. SG has all requisite corporate power and corporate authority to enter into and perform its obligations under this Agreement and to consummate the transactions to be consummated by it hereunder. SG has all requisite corporate power and corporate authority to enter into and perform its obligations under the other Operative Agreements to which it is a party and to consummate the transactions to be consummated thereby by it. The execution, delivery and performance by SG of the Operative Agreements to which it is a party have been duly authorized by all necessary corporate action on the part of SG. This Agreement has been, and the other Operative Agreements to which SG is a party have been, duly executed and delivered by it. This Agreement constitutes, and the other Operative Agreements to which SG is a party constitute, legal, valid and binding obligations of SG, enforceable against it in accordance with their respective terms, subject to the effect of any applicable bankruptcy, reorganization, insolvency, moratorium or similar laws affecting creditors' rights generally and subject to the effect of general principles of equity, including, without limitation, the possible unavailability of specific performance or injunctive relief regardless of whether considered in a proceeding in equity or at law. (c) NO CONFLICTS. The execution, delivery and performance by SG of this Agreement does not, and the execution, delivery and performance by SG of the other Operative Agreements to which it is a party and the compliance with the terms of the Operative Agreements to which it is a party will not conflict with, result in any violation of or default (with or without notice or lapse of time or both) under, give rise to a right of termination, cancellation or acceleration of any obligation (in each case by any third party) or to the loss of any benefit under, or result in or require the creation, imposition or extension of any Security Interest upon any of its properties or assets under (i) any provision of its Certificate of Incorporation or by-laws or similar constituent documents, or (ii) any Judgment, Injunction, Applicable Law or Contract to which it is a party or by which it or any of its properties is bound. To the knowledge of SG, no Third Party Approval and no Governmental Approval is required to be obtained or made by ITGI in connection with the execution, delivery and performance of this Agreement, the other Operative Agreements to which it is a party, and the transactions contemplated hereby and thereby. (d) BROKERS OR FINDERS. No Person is or will be entitled to any broker's or finder's fee, or any other commission or similar fee in connection with any of the transactions contemplated hereby as a result of any action taken by or on behalf of SG. (e) LITIGATION. There is no Proceeding pending or, to the knowledge of SG, threatened against SG reasonably likely to restrain, enjoin or otherwise prevent the consummation of the transactions contemplated hereby. (f) NON-COMPETE. As of the date of this Agreement, neither SG nor any of its Affiliates conducts any business activity which is the same as or substantially similar to the JV Business as described in clause (a) of Section 2.3. ARTICLE 6 CERTAIN COVENANTS 6.1 FURTHER ASSURANCES. From and after the date hereof, each of the Parties shall use its reasonable efforts to do or cause to be done, and to cause its Affiliates to do or cause to be done, such further acts and things and deliver or cause to be delivered to each other Party or its designees such additional agreements and instruments as such Party or its designees may reasonably require or deem advisable to carry into effect the purpose of the Operative Agreements or to better assure and confirm unto such Party or its designees its rights, powers and remedies hereunder and thereunder. 6.2 COMMITMENT OF VENTURERS TO THE JOINT VENTURE. Each of ITGI and SG agrees that it will (i) ensure that its relevant personnel are equally and fully committed to the success of the Joint Venture, (ii) devote sufficient resources so that it can comply fully with obligations under the Operative Agreements to which it is a party, and (iii) fulfill its obligations under this Agreement and any other Operative Agreements to which it is a party. 6.3 EFFECT OF APPLICABLE LAW. If any provision contained in any Operative Agreement relating to a JV Company is inconsistent with or prohibited by the Applicable Laws of the jurisdiction in which such JV Company is formed, the Parties agree to take all reasonable steps necessary to modify such provision in a manner which is as similar as possible in terms and effect as the original provision and which preserves substantially the intended purpose of the original provision, but which is not inconsistent with or prohibited by, the Applicable Laws of the jurisdiction in which such JV Company is formed. 6.4 NOTICE OF VENTURER CHANGE OF CONTROL. If a Venturer Change of Control occurs or is likely to occur with respect to a Venturer, subject to Applicable Law, such Venturer shall promptly give prior written notice to the other Venturer of such Venturer Change of Control. 6.5 ELECTION TO TREAT COMPANIES AS PARTNERSHIPS. The Venturers agree to join in, and agree to cause any Subsidiaries to join in, an election to treat each of the Company, ITGL and ITGE as a partnership for U.S. tax purposes under Section 7701 of the Code and Section 301.7701-3 of the Treasury Regulations. ARTICLE 7 MANAGEMENT 7.1 COMPOSITION OF THE BOARDS. (a) The board of directors of the Company (the "Company Board") shall consist of: (i) six (6) voting representatives, and (ii) additional non-voting representatives consisting of any members of the Executive Committee that are not otherwise serving as a voting representative on the Company Board. ITGI shall be entitled to designate three (3) such voting representatives to the Company Board, one of which will be the chief executive officer or chairman of ITGI, Inc. SG shall be entitled to designate three (3) such voting representatives, one of which will be the chief executive officer or chairman of SG Securities (London) Ltd. In each election of representatives, each Venturer shall vote its Equity Share Capital in the Company to effect the election of the nominees so designated (including the election of the non-voting representatives who consist of the members of the Executive Committee). Each of the Venturers agree to cause its designated representatives on the Company Board to act in accordance with the Business Plan. (b) The board of directors of ITGL (the "ITGL Board") and ITGE (the "ITGE Board") shall each consist of: (i) six (6) voting representatives, and (ii) two (2) additional non-voting representatives who must reside in Ireland. ITGI shall be entitled to designate three (3) such voting representatives and one (1) such non-voting representative to each of the ITGL and ITGE Board, one of which will be the chief executive officer or chairman of ITG, Inc. SG shall be entitled to designate three (3) such voting representatives and one (1) such non-voting representative, one of which will be the chief executive officer or chairman of SG Securities (London) Ltd. In each election of representatives, each Venturer shall vote its Equity Interests in the Company to effect the election of the nominees so designated. (c) Each of the Venturers shall appoint one of its voting representatives (or in his absence, an alternate) on each of the JV Boards to serve as a co-chairman, each of whom shall chair meetings of the respective JV Board on an alternating basis. (d) Subject to Applicable Law, the JV Boards shall operate in accordance with the general governance provisions contained in Article 9. 7.2 RESPONSIBILITIES OF THE COMPANY BOARD. The Company Board shall be responsible for the management of the business and affairs of the Company. Without limiting the generality of the foregoing, the Company shall and shall procure that each JV Company shall not take any action with respect to the following matters without the affirmative vote of the Company Board: (i) action by the Company or any of its Subsidiaries which (A) is outside the ordinary course of business operations of the Company or any such Subsidiary and (B) has not been reflected in an Approved Annual Budget; (ii) incurrence of any Indebtedness or the making of any capital expenditure by the Company or any of its Subsidiaries in excess of GBL100,000 in any case, or in the aggregate in any Financial Year, except as contemplated by the Approved Annual Budget and except, in the case of Indebtedness, for endorsements for collection or deposits in the ordinary course of business; (iii) mortgage, pledge or the granting of any other Security Interest with respect to the assets of the Company and its Subsidiaries, except purchase money mortgages in the ordinary course of business and other Permitted Liens; (iv) making of any loans or the agreement to make any loans by the Company or any of its Subsidiaries or the guarantee by any of them of any Indebtedness of any other Person in excess of GBL100,000, in any case, or in the aggregate in any Financial Year; (v) entering into any transaction, directly or indirectly (including, without limitation, any purchase, sale, lease, investment, loan, service or management agreement or other transaction) with either Venturer or any of their respective Affiliates involving the receipt or expenditure by the Company and any of its Subsidiaries of more than GBL100,000, in any case, or in the aggregate in any Financial Year, except as expressly contemplated by this Agreement or any of the other Operative Agreements or as specified in the Approved Annual Budget for such Financial Year or the Business Plan; (vi) declaration, setting aside, or payment of Distributions by the Company or any of its Subsidiaries or any redemptions, purchase or other acquisition of the equity securities of the Company or any of its Subsidiaries; (vii) any amendment of the Constituent Documents; (viii) any issuance, transfer, pledge or sale of equity securities by the Company, including, without limitation, capital stock, options, warrants or similar instruments, except as specifically provided in this Agreement; (ix) entering into or conducting any business other than the JV Business; (x) any appointment or change in the Company's independent auditors; (xi) approval of any material amendment or modification of the Business Plan; (xii) approval of any annual budget or any material amendment or modification of any Approved Annual Budget; (xiii) except as expressly provided herein with respect to the Founders Committee, the Executive Committee, the Audit Committee and the Compensation Committee, establishment of any committee of the Company Board and the delegation of powers thereto, it being expressly understood that any such committee shall at all time have an equal number of voting representatives designated by each of the Venturers; (xiv) appointment of the board of directors of any Subsidiary; (xv) (A) any acquisition by the Company or any of its Subsidiaries (in one or a series of related transactions) of, or any investment by the Company or any of its Subsidiaries (in one or a series of related transactions) in, assets or properties of any Person other than a Wholly-Owned Subsidiary (whether by acquiring shares or other equity securities, partnership interests or evidences of Indebtedness of any Person, by contributing to the capital of any Person, by making a loan, advance or other extension of credit to any other Person) in any case if the purchase price or amount to be invested in more than GBL100,000, or (B) the investment of cash included in the working capital of the Company in other than Authorized Investments; (xvi) any sale, assignment or transfer of any assets or properties of the Company in any Financial Year in excess of GBL100,000 in the case of any particular asset or property or in the aggregate in the case of a group of similar assets or properties except for such sales, assignments or transfers in the ordinary course of business; and (xvii) approval of any quarterly, semi-annual or annual financial statements of the Company and its Subsidiaries. 7.3 CERTAIN RESTRICTIONS. Anything herein to the contrary notwithstanding, in no event shall the Company Board approve any of the following matters without the prior written consent of each Venturer: (i) any amendment of the Constituent Documents of the Company; (ii) any sale or other transfer (in one or a series of related transactions) of substantially all of the assets and properties of the Joint Venture; (iii) whether, directly or indirectly, by operation of law or otherwise, any merger with, consolidation with, acquisition of all or substantially all of the assets or capital stock of, or other combination with, any Person; or (iv) the winding-up or dissolution of any JV Company except as otherwise provided in Section 15.6. 7.4 LANGUAGE. The proceedings of meetings of the board of directors of each of the JV Companies shall be conducted in the English language. The formal minutes of meetings of the board of directors of each of the JV Companies shall be maintained in the English language. The Company shall ensure that all senior management of the JV Companies will have a good working knowledge of English. 7.5 OFFICERS. The principal officers of the Company shall consist of a Director and a Secretary. The principal officers of the ITGL shall consist of a chief executive officer, deputy chairman and chief operating officer. The Company Board shall also have the power to appoint such other officers as it deems appropriate and delegate such powers to such officers as shall not be inconsistent with this Agreement, the Business Plan, Applicable Law and the Constituent Documents of the Company and ITGL, which may include a finance director, head of sales trading, head of settlements and head of technology. As of the date hereof, the initial slates of officers of the Company and ITGL shall be as set forth on SCHEDULE 7.5 attached hereto. 7.6 COMPENSATION. It is the intent of the Venturers that compensation and other forms of remuneration for employees and officers of the JV Companies, including incentive bonus plans, share participation schemes, pension plans and employee benefits plans, medical insurance, vacation and other benefit plans shall be consistent with the guidelines outlined in the Business Plan and, to the extent practicable, shall participate in the benefit plans offered by SG Securities (London), Ltd. with the costs of such participation being borne by the Company. 7.7 MANAGEMENT OF SUBSIDIARIES. The general provisions of Sections 7.1, 7.3, 7.4, 7.5 and 7.6 shall, to the extent practicable, govern the management of each Subsidiary of the Company including ITGL and ITGE. ARTICLE 8 COMMITTEES 8.1 COMPOSITION AND RESPONSIBILITIES OF THE FOUNDERS COMMITTEE. (a) The Venturers hereby constitute, effective on the date hereof, a founders committee (the "Founders Committee") consisting of two voting representatives designated by each Venturer. The voting representatives designated by ITGI shall at all times be senior ranking officers of ITG, Inc. or its Affiliates and the voting representatives designated by SG shall at all times be senior ranking officers of SG Securities (London) Ltd. or its Affiliates. As of the date hereof, the voting representatives of the Founders Committee designated by ITGI are Raymond L. Killian Jr. and Howard C. Naphtali and the voting representatives designated by SG are Hugh Hughes and Yves Tuloup. (b) The Founders Committee will be responsible for (i) resolving Deadlocks and (ii) any other matter assigned to the Founders Committee pursuant to the terms of this Agreement or any other Operative Agreement. (c) Consistent with Section 8.1(b), the Parties agree and shall give instructions to their respective representatives on the Founders Committee, that the purpose of the Founders Committee is not to engage in the management of the JV Companies, which management shall be effected in accordance with the Business Plan by the respective JV Boards, the Committees and the management of each of the JV Companies without referring, unless required pursuant to this Agreement or the other Operative Agreements, such matters to the Founders Committee. (d) The Founders Committee shall not operate in accordance with the general governance provisions contained in Article 9 and, following formation, the Founders Committee shall develop its own procedural guidelines for governance, including, without limitation, guidelines for the appointment of a chairman or co-chairmen thereof. The Founders Committee shall not meet in Ireland. 8.2 COMPOSITION AND RESPONSIBILITIES OF THE EXECUTIVE COMMITTEE. (a) ITGL shall constitute, effective on the date hereof or as soon thereafter as reasonably practicable, an executive committee of ITGL (the "Executive Committee") consisting of the chief executive officer, deputy chairman and chief operating officer of ITGL. (b) The Parties agree that the purpose of the Executive Committee is to establish and resolve matters of policy and not to engage in the management of ITGL. (c) The Executive Committee shall not operate in accordance with the general governance provisions contained in Article 9 and, following formation, the Executive Committee shall develop its own procedural guidelines for governance, including, without limitation, guidelines for appointment of a chairman or co-chairmen thereof. 8.3 COMPOSITION AND RESPONSIBILITIES OF THE MANAGEMENT COMMITTEE. (a) From and after the date hereof, ITGE shall constitute a management committee of ITGE (the "Management Committee") consisting of all of the respective senior and mid-level managers and department heads of ITGE including, without limitation, the chief executive officer, chief operating officer, head of technology, head of operations, deputy chairman, head of sales trading and finance director of ITGE, and such other non-managerial members as the Management Committee may appoint from time to time to serve thereon. (b) The Management Committee shall have the authority and responsibility to run the day-to-day operations of ITGE subject at all times to the direction and control of ITGE. It is the intention of the Venturers that, in the event that ITGE in the future has more than one Subsidiary, there may be established more than one Management Committee or sub-committee so that authority and responsibility to run the day-to-day operations of each Subsidiary, or of groups of several Subsidiaries, may be appropriately delegated. (c) The Management Committee shall not be operated in accordance with the general governance provisions contained in Article 9 and the Management Committee (and any such sub-committee thereof) will, when constituted, establish governance procedures; PROVIDED, HOWEVER, that such governance procedures shall follow the following guidelines: (i) the members shall establish a regular weekly meeting schedule except that any non-managerial level member thereof will only be required to attend meetings on a monthly basis; and (ii) the chief executive officer or, if such officer is not present at a meeting, the next most senior officer of the JV Companies in attendance shall act as chairman and preside over any such meetings. 8.4 COMPOSITION AND RESPONSIBILITIES OF THE COMPENSATION AND AUDIT COMMITTEE. The ITGL Board shall establish a Compensation Committee (the "Compensation Committee") and an Audit Committee (the "Audit Committee") each composed of two members who also serve on the ITGL Board, one of whom will be selected by the voting representatives serving on the Company Board that were designated by ITGI and the other of whom will be selected by the voting representatives serving on the Company Board that were designated by SG; PROVIDED, HOWEVER, that the members of the Audit Committee must not be Affiliates of either Venturer. The Compensation and Audit Committees shall have such authority as may be delegated to them from time to time by the ITGL Board with respect to compensation and financial matters, respectively. ARTICLE 9 GOVERNANCE PROVISIONS 9.1 MEETINGS; QUORUM; NOTICE. (a) The chairman (including any then acting alternating co-chairman) of each of the JV Boards shall prepare or direct the preparation of the agenda for, and preside over, meetings of the JV Board on which he serves as chairman. The chairman shall deliver such agenda to each representative on the JV Board on which he serves as chairman at least two Business Days prior to giving of notice of a regular or special meeting and any representative on such JV Board may add items to such agenda. (b) The Venturers anticipate that a regular meeting of each of the JV Boards shall be held at least once every six months. The Company Board shall not meet in Ireland and any meetings of the ITGL or ITGE Board shall take place in Ireland. Special meetings of any JV Board may be called by any voting representative on such JV Board and shall be held at such place as may be determined by such JV Board; PROVIDED, HOWEVER, special meetings of the Company Board shall not take place in Ireland and any special meetings of the ITGL or ITGE Board shall take place in Ireland. Written notice of the time and place of each regular and special meeting of any JV Board shall be given by or at the direction of the chairman or co-chairman, as the case may be, of such JV Board to each representative on such JV Board, in the case of a regular meeting, at least ten Business Days, and in the case of a special meeting, at least two Business Days, before such meeting. Whenever notice is required to be given to any representative on any JV Board, such notice shall specify the agenda for such meeting and, to the extent appropriate, shall be accompanied by supporting documentation. The required notice to any representative may be waived by such representative in writing. Attendance by a representative at a meeting shall constitute a waiver of any required notice of such meeting by such representative, except when such representative attends such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not properly called or convened. (c) Except as expressly provided in this Agreement, the presence of at least one voting representative designated by each of ITGI and SG to serve on such JV Board shall be required to constitute a quorum for the transaction of any business by any JV Board. Each Party shall use its reasonable efforts to ensure the existence of a quorum at any duly convened meeting of any JV Board. Except as expressly provided in this Agreement, no action shall be taken by any JV Board with respect to any matter without the affirmative vote of all of the voting representatives on such JV Board present at a duly constituted meeting and no action shall be taken by the JV Boards with respect to any matter without the affirmative vote of a majority of the voting representatives of such Board present at a duly constituted meeting. If fewer than all of the voting representatives designated to such JV Board by a given Venturer are present at a meeting, to the extent permitted by Applicable Law, each representative or representatives of a Venturer present at such meeting shall be entitled to vote the entire voting power held by all voting representatives designated by such Venturer. If more than one voting representative appointed by a given Venturer is present at a meeting, to the extent permitted by Applicable Law, such representatives shall vote such Venturer's entire voting power in the same manner. (d) While the Venturers intend that their representatives on each of the JV Boards shall attend meetings of such JV Boards in person, the Venturers acknowledge that representatives may from time to time be prevented from doing so due to various circumstances. Representatives on each JV Board may, therefore to the extent permitted by Applicable Law, participate in a meeting of such Board by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this Section 9.1(d) shall constitute presence in person at such meeting, except where a representative participates in the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting is not properly called or convened. (e) To the extent permitted by Applicable Law, any action required or permitted to be taken at a meeting of any JV Board may be taken without a meeting if a written consent, setting forth the action so taken, is signed by all the voting representatives on such JV Board and filed with the minutes of the proceedings of such Board. Such consent shall have the same force and effect as a unanimous affirmative vote of the representatives on such JV Board. 9.2 REMOVAL; RESIGNATION; VACANCIES. A Venturer's designated representatives on each JV Board shall hold office at the pleasure of such Venturer which designated them. Any such Venturer may at any time, by written notice to the other Venturer and the applicable JV Board, remove (with or without cause) its representative on such JV Board and designate a new representative. Subject to Applicable Law, no representative may be removed except by the Venturer designating the same. Any representative on any JV Board may resign at any time by giving written notice to the Venturer which appointed such representative and to such JV Board. Such resignation shall take effect on the date shown on or specified in such notice or, if such notice is not dated and the date of resignation is not specified in such notice, on the date of the receipt of such notice by the applicable JV Board. No acceptance of such resignation shall be necessary to make it effective. Any vacancy on any JV Board shall be filled only by the Venturer whose representative has caused the vacancy, by giving written notice to such Body and to each other Venturer, and each of the Venturers agree, as necessary, to vote, or to cause its designated representatives on such JV Board to vote, for any Person so nominated by the Venturer or other Person whose representative has caused such vacancy. 9.3 NO REMUNERATION. Unless the Venturers otherwise agree, no person shall be entitled to any fee, remuneration or compensation in connection with his service as a representative on or as a member of any JV Board. Notwithstanding the foregoing, the two non-executive, non-voting directors of ITGL and ITGE who are residents of Ireland shall be paid an attendance fee of Punt ,1,000 per meeting. ARTICLE 10 INDEMNIFICATION 10.1 INDEMNIFICATION. (a) To the fullest extent permitted under Applicable Law, the JV Companies shall indemnify and hold harmless, or cause its Subsidiaries to indemnify and hold harmless, each of their respective Affiliates and all officers, directors and shareholders (including the Venturers) of such Affiliates, and each director and officer of any JV Company and any Person serving in any similar capacity for another Person (including any JV Board) affiliated with the JV Companies at the request of the Company or any of its Subsidiaries (solely for purposes of this Section 10.1, each of the foregoing Persons being referred to as, a "Company Affiliate"), from and against any and all losses, claims, demands, costs, damages, liabilities, expenses of any nature (including reasonable attorneys' fees and disbursements), judgments, fines, settlements and other amounts arising from any and all claims, demands, actions, suits or proceedings, whether civil, criminal, administrative or investigative, in which a Company Affiliate may be involved, or threatened to be involved, as a party or otherwise, arising out of or incidental to the business of the Joint Venture, regardless of whether a Company Affiliate continues to be a Company Affiliate, at the time any such liability or expense is paid or incurred, if (i) the Company Affiliate acted in good faith and in a manner it or he reasonably believed to be in, or not opposed to, the interests of the JV Companies and, with respect to any criminal proceeding, had no reason to believe its or his conduct was unlawful, and (ii) the Company Affiliate's conduct did not constitute actual fraud, gross negligence or willful or wanton misconduct. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE, or its equivalent, shall not, in and of itself, create a presumption or otherwise constitute evidence that the Company Affiliate acted in a manner contrary to that specified in (i) or (ii) above. (b) Expenses (including reasonable legal fees and expenses) incurred in defending any proceeding subject to subsection (a) of this Section 10.1 shall be paid by the JV Companies in advance of the final disposition of such proceeding upon receipt of a written affirmation by the Company Affiliate of his or its good faith belief that he or it has met the standard of conduct necessary for indemnification under this Section 10.1 and a written undertaking (which need not be secured) by or on behalf of the Company Affiliate to repay such amount if it shall ultimately be determined, by a court of competent jurisdiction or otherwise, that the Company Affiliate is not entitled to be indemnified by the Company as authorized hereunder. (c) The indemnification provided by this Section 10.1 shall be in addition to any other rights to which each Company Affiliate may be entitled under any agreement or vote of a JV Board by the vote of representatives that are disinterested and unaffiliated with such Company Affiliate, as a matter of law or otherwise, both as to action in the Company Affiliate's capacity as a Company Affiliate or as a Person serving at the request of a JV Company and shall continue as to a Company Affiliate who has ceased to serve in such capacity and shall inure to the benefit of the heirs, successors, assigns, administrators and personal representatives of such Company Affiliate. (d) The JV Companies shall purchase and maintain directors and officers insurance or, similar coverage, for its directors and its officers in such amounts and with such deductibles or self-insured retentions as are customary for Persons engaged in businesses similar in size and type to those engaged in by the Joint Venture. (e) Any indemnification hereunder shall be satisfied only out of the assets of the JV Companies and the Venturers shall not be subject to personal liability by reason of these indemnification provisions. (f) A Company Affiliate shall not be denied indemnification in whole or in part under this Section 10.1 because the Company Affiliate had an interest in the transaction with respect to which the indemnification applies if the transaction was otherwise permitted by the terms of this Agreement and all material facts relating to such Company Affiliate's interest were adequately disclosed to the appropriate JV Board at the time the transaction was consummated. (g) The provisions of this Section 10.1 are for the benefit of the Company Affiliates and the heirs, successors, assigns, administrators and personal representatives of the Company Affiliates and shall not be deemed to create any rights for the benefit of any other Persons. (h) Any repeal or amendment of any provisions of this Section 10.1 shall be prospective only and shall not adversely affect any Company Affiliate's right existing at the time of such repeal or amendment. ARTICLE 11 DEADLOCKS 11.1 DEADLOCKS. (a) The parties agree that all Deadlocks on the Company Board, the ITGL Board or the ITGE Board shall be resolved in accordance with this Article 11. (b) A deadlock (a "Deadlock") shall be deemed to have occurred upon the failure of the Company Board, the ITGL Board or the ITGE Board, as the case may be, to reach a decision with respect to any of the following matters after a vote has been taken by the requisite voting representatives on the Company Board, the ITGL Board or the ITGE Board, as the case may be,: (i) approval of any annual budget; (ii) approval of a Capital Call in excess of the Stop Loss; (iii) approval of financings (debt or equity); (iv) approval of any acquisition or disposition in excess of GB,1,000,000; (v) approval of any material change in the purpose and strategic direction of the JV Business from that set forth in the Business Plan; or (vi) decisions relating to the hiring, firing or compensation of the chief executive officer of the Company. (c) If a Deadlock occurs on the Company Board, the ITGL Board or the ITGE Board, as the case may be, any voting representative on the Company Board, the ITGL Board or the ITGE Board, as the case may be, within twenty (20) days of the vote which give rise to such Deadlock, by written notice to the other voting representatives on such board, and to the Founders Committee, refer the Deadlock for resolution pursuant to Section 11.1(d). If no such voting representative refers such Deadlock to the Founders Committee for resolution within such 20-day period, no further action shall be taken by the Company Board, the ITGL Board or the ITGE Board, as the case may be, with respect to the proposal which gave rise to such Deadlock, but such proposal may be presented at a subsequent meeting of such board and any resulting Deadlock shall again be resolved in accordance with this Section 11.1(c). (d) If a Deadlock is referred to the Founders Committee for resolution, the Founders Committee shall have thirty (30) days to consider and attempt to resolve such Deadlock. If the Deadlock cannot be resolved by the Founders Committee within such 30-day period, the Founders Committee shall designate either (i) any voting representative serving on the Company Board, the ITGL Board or the ITGE Board, as the case may be, that is not an Affiliate of either Venturer or (ii) another person that is not an Affiliate of either Venturer and is qualified to act as an arbitrator with respect to the particular proposal that is the subject of the Deadlock (such representative or other person being herein referred to as, the "Third Party Arbitrator"). Such Third Party Arbitrator shall arbitrate the subject of the Deadlock in accordance with the rules of the International Chamber of Commerce (the "ICC") in effect on the date hereof and shall have thirty (30) days from his designation to recommend a course of action with respect to such Deadlock by sending written notices setting forth such course of action to the Company Board, the ITGL Board or the ITGE Board, as the case may be, and the Venturers (the "Resolution"). Unless during the 10-Business Day period following receipt of such notice the Venturers mutually agree upon a different course of action than the Resolution (in which event such different course of action shall for purposes of this Agreement be referred to as the "Venturer Resolution"), the Resolution or the Venturer Resolution, as the case may be, shall be final and binding on the Parties and the Venturers shall cause their voting representatives on the Company Board, the ITGL Board or the ITGE Board, as the case may be, to take action accordingly. (e) If there has been no Venturer Resolution and ITGI has not delivered a notice to SG pursuant to Section 11.1(f), following receipt of the notice of Resolution pursuant to Section 11.1(d), SG shall have the right at any time within a period of thirty (30) days from receipt thereof, by written notice to ITGI, to require ITGI to purchase all, but not less than all, of its Venture Interest for a cash price equal to one hundred-fifty percent (150%) of the applicable Reference Value. Such right shall be exercised by delivery of a written notice by SG to ITGI within such 30-day period. The date of such notice is referred to herein as the "Resolution Put Notice Date". Promptly following the Resolution Put Notice Date, the Venturers shall commence determining the Reference Value as set forth on SCHEDULE 1.1. (f) If there has been no Venturer Resolution and SG has not delivered a notice to ITGI pursuant to Section 11.1(e), following receipt of the notice of Resolution pursuant to Section 11.1(d), ITGI shall have the right at any time within a period of thirty (30) days commencing from the receipt thereof, by written notice to SG, to require SG to sell all, but not less than all, of its Venture Interest for a cash price equal to one hundred-fifty percent (150%) of the applicable Reference Value. Such right shall be exercised by delivery of a written notice by ITGI to SG within such 30-day period. The date of such notice is referred to herein as the "Resolution Call Notice Date." Promptly following the Resolution Call Notice Date, the Venturers shall commence determining the Reference Value as set forth on SCHEDULE 1.1. (g) The closing of a purchase and sale pursuant to Section 11.1(e) or 11.1(f) shall occur in accordance with Sections 12.5 and 12.6. ARTICLE 12 TRANSFERS OF VENTURE INTERESTS 12.1 GENERAL RESTRICTIONS. No Venturer may Transfer all or any part of such Venturer's Venture Interest, except as provided in this Agreement. Any purported Transfer of a Venturer's Venture Interest or a portion thereof in violation of the terms of this Agreement shall be null and void and of no effect. Any permitted transferee desiring to make a further Transfer shall become subject to all the provisions of this Article 12 to the same extent and in the same manner as any Venturer desiring to make any Transfer. 12.2 PERMITTED TRANSFEREES. Notwithstanding the provisions of Sections 12.3 and 12.4, each Venturer shall have the right to Transfer, by a written instrument, all or any part of its Venture Interest to a Permitted Affiliate; PROVIDED, HOWEVER, that such transfer is not materially financially detrimental to the JV Companies and that such Permitted Affiliate shall execute an instrument in form and substance reasonably satisfactory to the Company Board accepting and adopting the terms and provisions of this Agreement and the other Operative Agreements to which the transferor is a party and shall pay all reasonable expenses of the Company in connection with such Transfer, it being understood that upon such Transfer the transferor shall remain obligated under the Operative Agreements unless the Company Board otherwise agrees. 12.3 RIGHT OF FIRST REFUSAL. (a) If any Venturer (the "Seller") desires to Transfer all, and not less than all, of its Venture Interest (the "Offered Interest") pursuant to a bona fide offer (the "Bona Fide Offer") from a third party (the "Proposed Transferee"), other than a transferee permitted by Section 12.2, it shall submit a written offer (the "Written Offer") to Transfer such Venture Interest (collectively, the "Offered Interest") to the other Venturer (the "Offeree") on terms and conditions, including price, not less favorable to the Offeree than those on which the Seller proposes to Transfer such Offered Interest to the Proposed Transferee. The Written Offer shall disclose the identity of the Proposed Transferee, the Person or Persons, if any, that Control such Proposed Transferee, the Offered Interest proposed to be Transferred, the total number of Ordinary Shares and principal amount of any Subordinated Debt owned by the Seller, the terms and conditions, including price, of the proposed Transfer, and any other material facts relating to the proposed Transfer. The Written Offer shall further state that the Offeree may acquire, in accordance with the provisions of this Agreement, all of the Offered Interest for the price and upon the other terms and conditions, including deferred payment (if applicable), set forth therein. (b) The Offeree shall be permitted to confirm that the Bona Fide Offer is firm and subject only to conditions that could reasonably be expected to be satisfied, by (i) review of the documents involved in such Bona Fide Offer and (ii) requiring that the Proposed Transferee submit evidence reasonably satisfactory to the Offeree of any financing for such purchase. (c) (i) If the Offeree elects to purchase the Offered Interest at the price offered by the Proposed Transferee, the Offeree shall communicate in writing its election to purchase to the Seller, which communication shall be delivered to the Seller within 30 days of the date the Written Offer was made. Such communication shall, when taken in conjunction with the Written Offer, be deemed to constitute a valid, legally binding and enforceable agreement for the sale and purchase of the Offered Interest. (ii) The closing of the sale and purchase of the Offered Interest to the Offeree shall occur in accordance with Sections 12.5 and 12.6. (iii) If the Offeree does not elect to so purchase the Offered Interest, the Seller may sell the entire Offered Interest to the Proposed Transferee within 90 days following the expiration of the thirty (30) day period referred to in Section 12.3(c), upon terms that are no more favorable to the Proposed Transferee than those set forth in the Written Offer. For purposes of the preceding sentence, a purchase price that is less than ninety-five percent (95%) of the purchase price set forth in the Written Offer will be deemed more favorable to the Proposed Transferee. If the Proposed Transferee does not carry out its purchase within said 90-day period, or else withdraws its offer or introduces any changes thereto, the Offered Interests may not be sold, assigned or transferred unless previously offered to the Venturers once again pursuant to this Section 12.3. 12.4 VENTURER CHANGE OF CONTROL (a) SG shall have the right at any time within sixty (60) days after the later of (i) the occurrence of a Venturer Change of Control or (ii) the giving of notice of such Venturer Change of Control pursuant to Section 6.4, by written notice to ITGI (the date of such notice is referred to herein as the "Control Put Notice Date"), to require ITGI to purchase all, but not less than all, of its Venture Interest for a cash price equal to the Reference Value. Promptly following the Control Put Notice Date, the Venturers shall commence determining the Reference Value as set forth on SCHEDULE 1.1. (b) ITGI shall have the right at any time within sixty (60) days after the later of (i) the occurrence of a Venturer Change of Control or (ii) the giving of notice of a Venturer Change of Control pursuant to Section 6.4, by written notice to SG (the date of such notice is referred to herein as the "Control Call Notice Date"), to require SG to sell all, but not less than all, of its Venture Interest for a cash price equal to the applicable Reference Value. Promptly following the Control Call Notice Date, the Venturers shall commence determining the Reference Value as set forth on SCHEDULE 1.1. (c) The closing of a purchase and sale pursuant to Section 12.4(a) or 12.4(b) shall occur in accordance with Sections 12.5 and 12.6. 12.5 GOVERNMENTAL APPROVALS. Each of the Parties shall use all reasonable commercial efforts to obtain all Governmental Approvals required to effect any purchase and sale of Venture Interests pursuant to Sections 11.1(e), 11.1(f), 12.3(c)(ii), 12.4(a) or 12.4(b). If the required Governmental Approvals have not been received at the time any such closing is scheduled to occur, the contemplated transfer shall be deferred and made conditional until such time as the required Governmental Approvals have been obtained. 12.6 CLOSING OF PURCHASE OF VENTURE INTERESTS. Unless the Venturers otherwise agree, the closing of any purchase and sale of Venture Interests pursuant to Sections 11.1(e), 11.1(f), 12.3(c)(ii), 12.4(a) or 12.4(b) shall occur at the Company's principal executive office within sixty (60) days after the applicable notice of purchase and sale has been furnished. At such closing, (i) the Venturer transferring such Venture Interests (the "Transferring Party") shall transfer, assign and deliver to the Person purchasing such Venture Interests (the "Non-Transferring Party") the certificates or other documents evidencing the Venture Interests being purchased, duly endorsed for transfer, together with such assignments separate from any such certificate and other documents or instruments reasonably required by counsel for the Non-Transferring Party to consummate such purchase, and (ii) the Non-Transferring Party shall pay the purchase price in cash in GB Pounds Sterling. In addition, at the closing of such purchase and sale, (A) the Transferring Party shall deliver to the Non-Transferring Party an executed, written representation, in form and substance reasonably satisfactory to legal counsel for the Non-Transferring party, that the Transferring Party owns the Venture Interests free and clear of all Security Interests and that upon the delivery of the Venture Interests, the Transferring Party shall have transferred all of its right, title and interest in the Venture Interests, and (B) the Non-Transferring Party shall deliver to the Transferring party such investment representations as may be reasonably required to comply with applicable securities laws. ARTICLE 13 FINANCIAL AND ACCOUNTING MATTERS 13.1 BOOKS AND RECORDS; FINANCIAL YEAR. The Company shall, and shall cause its Subsidiaries to, to the extent permitted by Applicable Law, keep its accounts and financial and cost records in GB Pounds Sterling in English. The fiscal year of the Joint Venture and each of the JV Companies shall be the Financial Year. 13.2 FINANCIAL INFORMATION. The Company shall prepare in accordance with Irish GAAP (i) not later than sixty (60) days after the end of each Financial Year audited financial statements in English of the Company and its Subsidiaries, and (ii) not later than thirty (30) days after the end of each fiscal quarter (other than the final quarter of a Financial Year), unaudited financial statements in English of the Company and its Subsidiaries and shall also cause the Company to provide on a timely basis all statements in English necessary for each Venturer to prepare its tax returns as they relate to such Venturer=s interest in the Company. 13.3 RIGHT OF INSPECTION OF BOOKS. Each JV Company shall keep full, complete and accurate books of account, record and information with respect to its affairs and the same shall be maintained at the principal office of the JV Company. Entries shall be made in such books of account and records of all such matters, transactions and things as are usually written and entered in books of account and records kept by Persons engaged in businesses similar to the business of the JV Company or required by Applicable Law. Each Venturer shall have the right, acting reasonably and in coordination with the JV Companies= auditors and accounting personnel and, to the extent practicable, the other Venturer, to audit, examine, and make copies of or extracts from the books of account and records of the Company and its Subsidiaries at all reasonable times during usual business hours. Such right may be exercised through any agent or employee of such Venturer designated in writing by it or by an independent certified accountant designated in writing by such Venturer. Each Venturer shall bear all expenses incurred in any examination made for such Venturer's account. 13.4 ACCOUNTING PRINCIPLES. Unless otherwise agreed by the Venturers, the accounts and records of the Company and its Subsidiaries shall be maintained in accordance with Irish GAAP. 13.5 AUDITORS. The auditors of the Company, ITGL and ITGE shall be an internationally recognized auditing firm nominated by the Company Board and approved by the Venturers. Such firm shall be KPMG Peat Marwick LLP until changed by a vote of the Venturers. All audit reports and reports to management on internal controls and procedures prepared by such auditing firm shall be made available to the Company Board and each Venturer. ARTICLE 14 OTHER ACTIVITIES BY THE VENTURERS; EXPANSION OF TERRITORY; CONFIDENTIALITY 14.1 IN GENERAL. The Venturers acknowledge that to support their intention to make the Joint Venture the principal embodiment of the JV Business of the Venturers and to protect adequately their interests in the JV Companies, it is necessary and essential that the Venturers enter into and adhere to the covenants contained in this Article 14. 14.2 NON-COMPETITION OBLIGATIONS. (a) From and after the date hereof and until a date twelve (12) months following the termination of the JV Companies pursuant to the terms of this Agreement, except as otherwise expressly provided in Section 14.3 or as provided in Section 12 of the POSIT License Agreement and until a date twelve (12) months following the termination of the JV Companies pursuant to the terms of this Agreement, no Venturer or any of its Affiliates shall: (i) Offer Competing Services; or (ii) Invest or Participate in any Person that Offers Competing Services; or (iii) Except as required by Applicable Law, no senior officer or member of the board of directors of a Venturer shall serve as senior officer or member of a board of directors, managing board or similar governing body of a Major Competitor of the JV Companies. (b) In the event that the ITGI License Agreement is terminated by ITGI in accordance with Section 8(a)(iv) of the ITGI License Agreement, the non-compete obligations set forth in Section 14.2(a) above shall cease to apply. 14.3 NON-COMPETITION EXCEPTIONS. Except as expressly set forth in this Section 14.3, nothing in this Article 14 shall be construed to prohibit any of the following activities by a Venturer or any of its Affiliates after the date hereof. (a) INVESTMENTS. The acquisition or ownership by a Venturer (directly or indirectly through an Affiliate) (other than where such acquisition or ownership is held by such Venturer solely as a trustee or nominee for an unaffiliated third party) of a Person or an Equity Interest in such a Person through merger, consolidation, purchase of stock or assets or otherwise, if the annual consolidated gross revenues attributable to Competing Services of such Person do not exceed five percent (5%) of the annual consolidated gross revenues of such Person as set forth in the most recently available audited financial statements of such Person as of the date of execution of the definitive agreement providing for such acquisition. (b) FIVE PERCENT INVESTMENTS. The acquisition or ownership by a Venturer (directly or indirectly through an Affiliate) of any securities of a publicly held Person engaged in Competing Services, if such securities (i) were not acquired directly from such Person in a private placement or similar transaction, (ii) do not represent more than five percent (5%) of the aggregate voting power of the outstanding equity securities of such Person (other than where such acquisition or ownership is held by such Venturer solely as a trustee or nominee for an unaffiliated third party) (assuming the conversion, exercise or exchange of all such securities held by such Venturer or its Affiliate that are convertible, exercisable or exchangeable into or for voting securities), and (iii) in the case of debt securities, entitle the holder thereof to receive only interest or other returns that are not based on the value or results of operations of such Person. (c) INVESTMENT FUNDS. The acquisition or ownership (directly or indirectly thorough an Affiliate) by a Venturer of an ownership interest in an investment fund or plan (including pension and retirement plans) investing on behalf of the employees or retirees of such Venturer or its Affiliates or the continued sponsorship by such Venturer (or Affiliate) thereof; provided that no investment by any such fund or plan has the purpose or effect of changing or influencing the Control of any Person that Offers Competing Services. 14.4 EXPANSION OF TERRITORY. Each of the Venturers acknowledges that the JV Business shall only be conducted in connection with equity securities traded on securities exchanges located within the Territory and that the countries and regions comprising the Territory can only be changed by mutual agreement in writing by the Venturers. The foregoing notwithstanding, in the event any Venturer contemplates Offering Competing Services in any country or region in South Africa, Turkey or Asia that is not part of an Excluded Territory, such Venturer shall first consult with the other Venturer with respect to expanding the Territory to include such country or region. 14.5 CONFIDENTIALITY. Each Venturer shall use, and shall cause its Affiliates, employees and agents to use, their respective reasonable best efforts to ensure that the terms of this Agreement, the other Operative Agreements (including all Exhibits and Schedules hereto and thereto) and confidential proprietary information concerning the other Venturer, the JV Business and affairs of the Company and its Subsidiaries are not disclosed to third parties unless the other Venturer shall have consented to such disclosure in writing; PROVIDED, HOWEVER, that such information may be disclosed to third parties to the extent reasonably required to accomplish any proposed transfer under Article 12, as necessary in connection with any private offering of securities of a Venturer or any of its Affiliates, if the Person to which the information is disclosed agrees in writing to keep such information confidential, as necessary in connection with any Public Offering of securities of a Venturer or any of its Affiliates (and related reporting obligations occasioned thereby), and as required by law. ARTICLE 15 TERM AND TERMINATION DEFAULT 15.1 TERM OF JV COMPANIES. Each JV Company shall continue without interruption until it is dissolved and terminated pursuant to the terms of this Agreement, the Constituent Documents and Applicable Law. 15.2 TERMINATION OF JOINT VENTURE. The following shall be "Termination Conditions" with respects to the Joint Venture: (a) a Funding Breach with respect to a Capital Call (in which case the non-defaulting Venturer may deliver a written notice (a) "Termination Notice") in accordance with Section 15.3; (b) a Material Non-Monetary Default (in which case the non-defaulting Venturer may deliver a Termination Notice in accordance with Section 15.3); (c) the Bankruptcy of a Venturer (in which case the non-bankrupt Venturer may deliver a Termination Notice in accordance with Section 15.3); (d) the termination of the POSIT License (in which case any Venturer may deliver a Termination Notice in accordance with Section 15.3); or (e) written mutual consent of the Venturers (in which case any Venturer may deliver a Termination Notice in accordance with Section 15.3). 15.3 TERMINATION NOTICE. (a) If a Termination Condition occurs, a Party entitled to deliver a Termination Notice pursuant to Section 15.2 may give such Termination Notice to the other Parties and to the Executive Committee within 60 days following the date upon which such Party becomes aware of the occurrence of the Termination Condition. If any Venturer delivers a Termination Notice, the other Venturer shall be precluded from delivering a subsequent Termination Notice. (b) Each Venturer acknowledges and agrees that (i) it shall not challenge the validity of any provision of this Article 15 in any Proceeding and (ii) each Venturer shall have a right to seek specific performance of each provision of this Article 15. 15.4 TERMINATION UPON DEFAULT, ETC. In the case of a Termination Condition under Section 15.2(a), (b) or (c), the non-defaulting Venturer delivering the Termination Notice shall have the right to exercise its option to purchase all but not less than all, of the Venture Interest of the defaulting Venturer at eighty percent (80%) of the defaulting Venturer's investment to date plus interest on amounts invested from time to time at the Applicable Rate (the "Default Termination Value") by delivering a written notice of exercise within sixty (60) days following the occurrence of any such Termination Condition. This reduction to eighty percent (80%) of the investment to date plus interest on amounts invested from time to time at the Applicable Rate is agreed by both parties as a reasonable pre-estimate by way of liquidated damages of the likely loss, direct and indirect, which would be incurred by the non-defaulting Venturer in consequence of a Termination Condition arising under Section 15.2 (a) (b) or (c) hereof in relation to the defaulting Venturer, this assessment taking into account the financial and other commitments made by both Venturers under this Agreement in relation to the establishment and proposed long term operation of the Joint Venture. Such written notice shall constitute an offer by the non-defaulting Venturer to purchase the Venture Interests of the defaulting Venturer at a price equal to the Default Termination Value, and the defaulting Venturer hereby accepts any such offer by the non-defaulting Venturer. If the non-defaulting Venturer fails to deliver such written notice of such exercise within said 60-day period, it will be deemed to have elected not to purchase the Venture Interest of the defaulting Venturer. In the event that non-defaulting Venturers purchases the Venture Interest of the defaulting Venturers pursuant to this Section 15.4, the purchase price for the Venture Interest shall be an amount payable in cash in GB Pounds Sterling. 15.5 CLOSING. Each of the Parties shall use its reasonable efforts to obtain all Governmental Approvals required to effect the purchase and sale of Venture Interests, pursuant to Section 15.4. Unless the Parties have failed to receive all required Governmental Approvals, the closing of the purchase of a Venture Interest pursuant to this Article 15 shall be held at the offices of the purchasing Venturer within ten (10) days after the final determination of the purchase price to be paid to the selling Venturer. If in spite of the Venturers' efforts in this regard, the required Governmental Approvals have not been received at the time the closing is scheduled to occur, the closing shall be postponed until such date as the Venturers shall have obtained the required Governmental Approvals; provided that, if such Governmental Approvals are not obtained prior to the first anniversary of the date on which such closing is postponed, at the request of any Venturer, the Venturers shall negotiate in good faith to provide for the termination of the Joint Venture pursuant to such mutually agreeable terms and conditions as will permit the Venturers to obtain all Governmental Approvals required for the termination of the Joint Venture, and as will have substantially the same economic consequences to the Venturers as the transaction contemplated by Section 15.4. At the closing, the purchasing Venturer and the selling Venturer shall make the deliveries specified in Section 12.6. 15.6 TERMINATION BY DISSOLUTION. In the case of a Termination Condition under Section 15.2(d) or (e) upon delivery of a Termination Notice, the Venturers shall proceed to dissolve the Joint Venture by the Venturers causing their representatives on the JV Boards to proceed with the winding up of the affairs and liquidation of the JV Companies through the sale of their respective assets and properties. Notwithstanding the foregoing, in the event that a Venturer fails to give a Termination Notice within the time period set forth in Section 15.3, such Venturer shall be deemed to have waived its right to dissolve, with respect to the event or events which gave rise to such right to dissolve. ARTICLE 16 POST TERMINATION PROVISIONS 16.1 CONSEQUENCES OF TERMINATION. Upon the transfer by at least one Venturer of its entire Venture Interest in accordance with this Agreement (other than a transfer pursuant to Section 12.2), this Agreement and the other Operative Agreements shall forthwith cease to have effect as between such Party and the other Parties, and all further obligations of such Party (and its Affiliates) to such other Parties (and their Affiliates) and of such other Parties (and their Affiliates) to such Party (and its Affiliates) shall terminate with this Agreement and the other Operative Agreements without further liability, except that: (a) such transfer shall not constitute a waiver of any rights that any Party (or any of its Affiliates) may have by reason of a breach of this Agreement or any other Operative Agreement, subject to any limitations thereon in this Agreement or the other Operative Agreements; (b) the provisions of this Article 16, Article 10, Article 14, other than Section 14.4, and Article 18, other than Sections 18.8 and 18.10 of this Agreement shall continue in full force and effect; and (c) The rights and obligations of the Parties (and their Affiliates) under the Service Agreements shall continue in full force and effect for a period of six months from such transfer; and (d) the rights and obligations of the Parties (and their Affiliates) under the Operative Agreements, other than the Service Agreements, shall continue in full force and effect to the extent provided in the Transition Plan. 16.2 NON-SOLICITATION. Anything herein to the contrary notwithstanding, upon the Transfer by SG of all of its Venture Interest in accordance with this Agreement, for a period commencing on the date of such Transfer and ending on the first anniversary of such Transfer, SG shall not, and shall cause its Affiliates not to, induce or attempt to influence any employees of the JV Companies or any of their Affiliates to terminate such employee's employment therewith. 16.3 TRANSITION PLAN. The Parties agree to negotiate in good faith to develop a plan (the "Transition Plan") which will govern the rights and obligations of the parties under the Operative Agreements following an event described in Section 16.1 and which will ensure that the successor to the JV Business shall continue to supply services to its customers without disruption. Each of the Parties agrees to cause its Affiliates and, insofar as within its control, the JV Companies, to comply with the provisions of the Transition Plan. ARTICLE 17 NEGOTIATIONS; ARBITRATION; SUBMISSION TO JURISDICTION 17.1 NEGOTIATIONS; ARBITRATION. (a) In the event of any dispute, controversy or claim (other than a Deadlock) arising out of or relating to this Agreement, or the performance, breach, termination, or invalidity hereof, such dispute, controversy or claim shall be the subject of an attempt at an amicable solution, for which purpose any party shall give notice to the other parties, giving a concise description of the matter in question and the position of such party in respect thereof and proposing a meeting among the chief executive officers, executive managing directors or their designees (the "Senior Officers") of the ultimate parent companies of the Venturers in The City of Dublin (or such other place as they may agree) with the purpose of resolving the dispute, controversy or claim. (b) In the event such a meeting is called, the meeting shall take place within ten (10) Business Days of its being requested. Unless the parties otherwise agree, if such meeting does not take place within such ten (10) Business Days or if within ten (10) Business Days after such meeting the Senior Officers have not resolved such matter, then the matter shall be settled by arbitration in accordance with the rules of the ICC in effect on the date hereof. The arbitration shall be the sole and exclusive forum for resolution of the dispute, controversy or claim, and the award shall be final and binding. Judgment thereon may be entered by any court having jurisdiction. The number of arbitrators shall be three (or such other number as shall be stipulated by the most recent then existing Rules of the ICC), each of whom shall be disinterested in the dispute, controversy or claim and shall be impartial and independent of any party. Each Venturer (and its Affiliates, as applicable) and Venturer (and its Affiliates, as applicable) shall appoint one arbitrator, and the two so appointed shall choose a third arbitrator. If the arbitrators chosen by the Venturers cannot agree on the choice of the third arbitrator within a period of thirty (30) days after both of them have been appointed, then the third arbitrator shall be appointed by the ICC. The parties and the appointing authority may appoint from among the nationals of any country, whether or not a party is a national of that country. The place of arbitration shall be The City of Dublin, Ireland. The arbitration shall be conducted in the English language and any foreign-language documents presented at such arbitration shall be accompanied by an English translation thereof. The arbitrators shall state the reasons upon which the award is based. The arbitrators shall apply the laws of Ireland without regard to the principles of conflicts of laws. (c) Any matter expressed in this Agreement to be a matter for review, collaboration, consultation, consent, decision, agreement or vote by the parties or any of them shall not, in the event of failure of decision or agreement, constitute a dispute or difference to be referred to or settled by arbitration proceedings. (d) Each of the parties hereby submits to the exclusive jurisdiction of the Irish Courts (the "Specified Court") in any action, suit or proceeding with respect to the enforcement of the arbitration provisions of this Agreement and the non-exclusive jurisdiction of such court with respect to the enforcement of any award thereunder. Each party irrevocably appoints the agent for service specified opposite its name on the signature pages hereof as its authorized agent in the city of Dublin, Ireland upon which process may be served in any related proceeding, and agrees that service of process upon such agent, and written notice of said service to such party, by the person serving the same to the address so provided, shall be deemed in every respect effective service of process upon such party in any such action, suit or proceeding. Each party further agrees to take any and all action as may be necessary to maintain such designation and appointment of such agent in full force and effect for the duration of this Agreement. ARTICLE 18 MISCELLANEOUS 18.1 NOTICES. Except as expressly provided herein, notices and other communications provided for herein shall be in writing in the English language and shall be delivered by hand or courier service, mailed or sent by telex, facsimile, graphic scanning or other telegraphic communications equipment of the sending Party, as follows: If to ITGI, to: ITG International Limited c/o KPMG Peat Marwick LLP P.O. Box HM906 Hamilton HMDX Bermuda Attn: Claudio Satasi with a copy to: ITG, Inc. 380 Madison Avenue, 4th Floor New York, New York 10017 U.S.A. Attn: General Counsel Tel: (212) 588-4000 Fax: (212) 444-6345 with a copy to: Weil, Gotshal & Manges LLP 767 Fifth Avenue New York, New York 10153 U.S.A. Attn: David E. Zeltner, Esq. Tel: (212) 310-8220 Fax: (212) 310-8007 with a copy to: MHC Corporate Secretarial Services Limited, at its registered office for the time being in Dublin, Ireland Attn: David O'Donnell Tel: 353 1 6611788 Fax: 353 1 6611431 If to SG, to: Tour Societe Generale 92972 Paris - La Defense Cedex France Attn: Yves Tuloup Tel: 33 1 4213 7388 Fax: 33 1 4213 7390 Attn: Pierre Teniere Tel: 33 1 4213 2136 Fax: 33 1 4213 6925 with a copy to: Societe Generale Securities (London) Ltd. Exchange House Primrose Street London EC2 Attn: Hugh Hughes / Nigel Brahams Tel: 44 171 762 4444 Fax: 44 171 762 4555 with a copy to: Goodbody Secretarial Limited at its registered office for the time being in Dublin, Ireland Attn: James Dudley Tel: 353 1 661 3311 Fax: 353 1 661 3278 or to such other address or attention of such other Person as such Party shall advise the other Parties in writing. All notices and other communications given to the Parties hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. Communications sent by telex, facsimile, graphic scanning or other telegraphic communications equipment shall be deemed to have been received when confirmation of their delivery is received by the sender. 18.2 APPLICABLE LAW. The validity, construction and performance of this Agreement shall be governed by and construed in accordance with the law of Ireland, regardless of the laws that might otherwise govern under applicable principles of conflicts or choice of law. 18.3 SEVERABILITY. If any provision of this Agreement shall be held to be illegal, invalid or unenforceable, the Parties agree that such provision will be enforced to the maximum extent permissible so as to effect the intent of the Parties, and the validity, legality and enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby. If necessary to effect the intent of the Parties, the Parties will negotiate in good faith to amend this Agreement to replace the unenforceable language with enforceable language which as closely as possible reflects such intent. 18.4 AMENDMENTS. This Agreement may be modified only by a written amendment signed by all of the parties to this Agreement. 18.5 WAIVER. The waiver by a Party of any instance of any other Party's non-compliance with any obligation or responsibility herein shall be in writing and signed by the waiving Party and shall not be deemed a waiver of other instances of such other Party's non-compliance. 18.6 COUNTERPARTS. This Agreement may be executed in one or more counterparts, all of which shall be considered one and the same agreement, and shall become effective when one or more counterparts shall have been signed by each Party and delivered to the other Parties. 18.7 ENTIRE AGREEMENT. The provisions of this Agreement set forth the entire agreement and understanding among the Parties as to the subject matter hereof and supersede all prior agreements, oral or written, and all other prior communications between the Parties relating to the subject matter and those written agreements executed and delivered contemporaneously herewith. 18.8 NO ASSIGNMENT. (a) Except as specifically provided herein, no Party shall, directly or indirectly, assign this Agreement or any of its rights or obligations hereunder without the prior written consent of the other Parties. (b) Any attempted assignment of this Agreement in violation of this Section 18.8 shall be void and of no effect. (c) This Agreement shall be binding upon, inure to the benefit of and be enforceable by the Parties and their respective successors and permitted assigns. 18.9 NO THIRD-PARTY BENEFICIARIES. Except for the provisions of Article 10 hereof, this Agreement is for the sole benefit of the Parties and their permitted assigns, and nothing herein express or implied shall give or be construed to give to any Person, other than the Parties and such assigns, any legal or equitable rights hereunder. 18.10 PUBLICITY. The Parties shall use reasonable efforts to consult in good faith with each other with a view to agreeing upon any press release or public announcement relating to the transactions contemplated hereby or by the other Operative Agreements prior to the consummation thereof. 18.11 CONSTRUCTION. This Agreement has been negotiated by the Parties and their respective counsel and shall be fairly interpreted in accordance with its terms and without any strict construction in favor of or against any of the Parties. 18.12 DISCLAIMER OF AGENCY. Except for provisions herein expressly authorizing one Party to act for another, this Agreement shall not constitute any Party as a legal representative or agent of any other Party, nor shall a Party have the right or authority to assume, create or incur any liability or any obligation of any kind, express or implied, against or in the name or on behalf of any other Party or any of its Affiliates or the Joint Venture or any of the JV Companies unless otherwise expressly permitted by such Party. 18.13 RELATIONSHIP OF THE PARTIES. The relationship among the Parties shall not be that of partners and nothing herein contained shall be deemed to constitute a partnership among them. 18.14 FIDUCIARY DUTIES. Subject to Applicable Law, no Party or any of its Affiliates nor any officer, director, employee or former employee of any Party or its Affiliate shall have any obligation, or be liable, to any Party, the Joint Venture or any JV Company for exercising any of the rights of such Party or such Affiliate under this Agreement or any other Operative Agreement to which it is or will be a party, for exercising or failing to exercise its rights as a shareholder of any JV Company or for breach of any fiduciary or other similar duty to any Party, the Joint Venture or any JV Company by reason of such conduct, other than a breach of any Operative Agreement. IN WITNESS WHEREOF, each of the Parties has cause its respective duly authorized officers to execute this Agreement as of the day and year first above written. ITG International Limited By: /s/ Howard C. Naphtali ------------------------------- Name: Howard C. Naphtali Title: President Societe Generale By: /s/ H. L. Hughes ------------------------------- Name: H. L. Hughes Title: Authorized Signatory Investment Technology Group SG Limited By: /s/ H. L. Hughes ------------------------------- Name: H. L. Hughes Title: President Investment Technology Group Limited By: /s/ Alasdair Haynes ------------------------------- Name: Alasdair Haynes Title: CEO Investment Technology Group Europe Limited By: /s/ Adrian Collins ------------------------------- Name: Adrian Collins Title: Deputy Chairman November 17, 1998 GUARANTEE BY INVESTMENT TECHNOLOGY GROUP, INC. To Societe Generale, Investment Technology Group SG Limited, Investment Technology Group Limited and Investment Technology Group Europe Limited (collectively, the "Guaranteed Parties") 1. In consideration of the Guaranteed Parties entering into a Joint Venture Agreement (the "Agreement") by and among the Guaranteed Parties and ITG International Limited ("ITGI"), dated as of November 17, 1998, Investment Technology Group, Inc. ("Guarantor"), the corporate parent of ITGI, unconditionally and irrevocably, as a primary and continuing obligation, guarantees to the Guaranteed Parties, the proper and punctual performance by ITGI of all of ITGI's obligations under the Agreement and undertakes to pay on demand, all amounts whatsoever owing by ITGI under the Agreement. 2. This guarantee is a continuing guarantee and will remain in force until all the obligations (actual or contingent) of ITGI under the Agreement have been discharged in full. 3. The Guarantor shall not, without first obtaining the Guaranteed Parties' written consent, act in a liquidation or winding up of ITGI in competition with the Guaranteed Parties for any amount whatsoever owing by ITGI pursuant to the Agreement. 4. All amounts payable hereunder shall be paid in full without any deduction or withholding whatsoever (whether in respect of set-off, counterclaim, duties, taxes or charges) unless such deduction or withholding is required by law, in which event the Guarantor shall pay under the Agreement an additional amount so that the net amount received by the Guaranteed Parties will equal the full amount which the Guaranteed Parties would have received had such amount been paid directly by ITGI. 5. The Guarantor acknowledges that it has represented to the Guaranteed Parties and hereby warrants, that it has full power and authority to enter into this Guarantee, that it has taken all necessary corporate or other actions to authorize the same, and that as executed, this Guarantee (and the performance of all its obligations herein contained) does not and will not constitute a breach of any law or governmental regulation or order to which the Guarantor is subject, or any agreement by which the Guarantor is bound, and is and will be valid, binding and enforceable in accordance with its terms. 6. Terms defined in the Agreement shall bear the same meanings when used herein. 7. Any notice or demand herein shall be in writing in the English language and shall be delivered by hand or courier service, mailed or sent by facsimile, as follows: Investment Technology Group, Inc. 380 Madison Avenue, 4th Floor New York, New York 10017 United States Attn: General Counsel Fax: 212-444-6345 or to such other address or attention of such other person as the Guarantor shall advise the Guaranteed Parties in writing. All notices and demands given or served in accordance with the provisions of this Guarantee shall be deemed to have been given on the date of receipt. Communications sent by facsimile shall be deemed to have been received when confirmation of delivery is received by the sender. 8. The validity, construction and performance of this Guarantee shall be governed by and construed in accordance with the laws of Ireland regardless of the laws that might otherwise govern under applicable principles of conflicts or choice of law. Investment Technology Group, Inc. By: /s/ Raymond L. Killian, Jr. --------------------------------------- Name: Raymond L. Killian, Jr. Title: Chairman EX-10.2-1 5 EXHIBIT 10.2.1 AMENDMENT NO. 1 TO SERVICE AGREEMENT DATED MARCH 15, 1994 BETWEEN JEFFERIES & COMPANY, INC. AND ITG INC. Jefferies & Company, Inc. ("Jefferies") and ITG Inc. ("ITG") hereby enter into this Amendment, dated as of January 1, 1999, to that certain Service Agreement dated March 15, 1994, by and between Jefferies and ITG (the "Service Agreement"). 1. Sections 1.a(ii), 1.b, 1.d, 1.e, 1.f(ii), 1.f(iii) and 1.g are hereby deleted from the Service Agreement. 2. Exhibits 1 through 6 are hereby deleted from the Service Agreement and replaced with Exhibits 1 through 2 hereof. 3. Sections 1.c(i), 1.c(ii) and 1.c(iii) are hereby deleted and replaced with the following: c. Jefferies shall administer the qualified and non-qualified benefit plans that ITG provides its employees through Jefferies or Jefferies Group, Inc. 4. Section 6 is hereby deleted and replaced with the following: 6. TERM AND TERMINATION a. Services provided under this Agreement shall terminate automatically, without any further action by either of the parties hereto, as follows: (i) With respect to the Accounting Services set forth in Section 1.a, on June 30, 1999; and (ii) With respect to the Personnel Services set forth in Section 1.c, on the later to occur of (A) such date as the plan assets for ITG's employees have been transferred by the Jefferies Group, Inc. Employees' Profit Sharing Plan to a defined contribution plan and trust maintained by Investment Technology Group, Inc. or an employee stock ownership plan and trust maintained by Investment Technology Group, Inc. (the "ITG ESOP") and (B) such date as the plan assets for ITG's employees have been transferred by the Jefferies Group, Inc. Employee Stock Ownership Plan to the ITG ESOP. b. Upon termination of either of the services described in Section 6.a above, the related charges applicable thereto shall also terminate. c. This Agreement shall terminate automatically, without any further action by either of the parties hereto, upon the termination of each of the Accounting Services and Personnel Services as provided in Section 6.a above. d. Upon termination of this Agreement, the obligations of each party under Sections 2 and 3 of this Agreement shall survive such termination. e. Jefferies agrees to provide ITG reasonable opportunity to copy, or remove from Jefferies' premises, any accounting records relating to Investment Technology Group, Inc. and its subsidiaries prior to destroying them. Except as specifically amended hereby, the terms and conditions of the Service Agreement shall remain in full force and effect. ITG INC. JEFFERIES & COMPANY, INC. By: /s/ Raymond L. Killian, Jr. By: /s/ Clarence T. Schmitz ------------------------------ ------------------------------ Name: Raymond L. Killian, Jr. Name: Clarence T. Schmitz Title: President Title Executive Vice President EX-10.2-2 6 EX-10.2-2 EXECUTION AGREEMENT This Agreement is made this 1st day of January, 1999, by and between W & D Securities, Inc. ("W & D"), a California corporation, and ITG Inc. ("ITG"), a Delaware corporation. WHEREAS, ITG has entered into an agreement with W & D (the "Omnibus Clearing Agreement") to clear and settle transactions which are executed by W & D on the New York Stock Exchange ("NYSE") on behalf of customers of ITG; and WHEREAS, ITG desires to avail itself of certain services offered by W & D with respect to executions effected on the NYSE and other regional exchanges; and WHEREAS, W & D desires to provide to ITG the services described below subject to the terms and conditions of this Agreement; NOW, THEREFORE, for and in consideration of the promises and mutual agreements set forth herein, W & D and ITG agree as follows: 1. SERVICES PROVIDED BY W & D WITH RESPECT TO ITG'S TRADE ENTRY AND EXECUTION a. W & D's Operations Department shall be responsible for trade execution and trade entry on the books and records of Jefferies & Company, Inc. for all trades executed by W & D as agent for ITG on the NYSE, on any other regional stock exchange, and in the over-the-counter market. W & D's Operations Department will also be responsible pursuant to the Omnibus Clearing Agreement for the clearance and settlement of all trades executed by W & D as agent for ITG on the NYSE. W & D will provide daily reconciliation of orders sent by ITG not later than 12:00 pm on T+1. b. W & D's Operations Department shall be available for trade entry and clearance and settlement of trades executed on the NYSE pursuant to the Omnibus Clearing Agreement, so long as the Omnibus Clearing Agreement remains in effect. c. W & D shall provide to ITG the full benefit of any operating systems changes, whether automated or manual, implemented by W & D. W & D will continue to provide the support for order handling, systems and account set-up that it currently provides to ITG. d. W & D shall negotiate, pay and account within 15 days of month end all specialist and $2 broker bills. 2. CONFIDENTIALITY a. W & D will exercise reasonable care to prevent access to information regarding ITG or ITG's customers by unauthorized persons and will keep confidential any information it has concerning the business of ITG. Notwithstanding the foregoing, W & D shall be held harmless for complying with any request for information or documents by the Securities and Exchange Commission or other regulatory or self-regulatory authority or any court order or other legal process which W & D believes to be valid and effective. b. ITG will keep confidential any information it may acquire regarding W & D and its business. Notwithstanding the foregoing, ITG shall be held harmless for complying with any request for information or documents by the Securities and Exchange Commission or other regulatory authority or any court order or other legal process which ITG believes to be valid and effective. 3. INDEMNIFICATION ITG will indemnify, protect and hold harmless W & D, its officers and employees, and each person, if any, controlling W & D, from and against all manner of claims, demands, proceedings, suits or actions (whether in law or in equity) and liabilities, losses, expenses and costs (including attorneys' fees) in the event (i) ITG fails to properly exercise its obligations as set forth herein, or (ii) any customer of or regulator for ITG institutes a claim, suit, action, arbitration or other proceeding against W & D for any reason, PROVIDED, HOWEVER, that W & D shall not be entitled to indemnification in any such manner if W & D is found to have acted with gross negligence in the performance of its services under this Agreement. 4. REPRESENTATIONS AND WARRANTIES a. ITG represents and warrants as follows: (1) ITG is and during the term of this Agreement will remain a member in good standing of the National Association of Securities Dealers, Inc.; (2) ITG is and during the term of this Agreement will remain duly registered or licensed and in good standing as a broker-dealer under all applicable federal and state securities laws; (3) ITG has all requisite authority, whether arising under applicable federal or state laws and rules and regulations of any securities exchange or securities association to which it is subject, to enter into this Agreement and to retain the services of W & D in accordance with the terms hereof; and (4) ITG is now and during the term of this Agreement will remain in compliance with the capital and financial reporting requirements of every securities exchange and/or securities association of which it is a member, the Securities and Exchange Commission, and every state in which it is licensed as a broker-dealer. b. W & D represents and warrants as follows: (1) W & D is and during the term of this Agreement will remain a member in good standing of the National Association of Securities Dealers, Inc. and the NYSE; (2) W & D is and during the term of this Agreement will remain duly registered or licensed and in good standing as a broker-dealer under all applicable federal and state securities laws; (3) W & D has all requisite authority, whether arising under applicable federal or state laws and rules and regulations of any securities exchange or securities association to which it is subject, to enter into this Agreement and to retain the services of W & D in accordance with the terms hereof; and (4) W & D is now and during the term of this Agreement will remain in compliance with the capital and financial reporting requirements of every securities exchange and/or securities association of which it is a member, the Securities and Exchange Commission, and every state in which it is licensed as a broker-dealer. 5. COMPENSATION During the term of this Agreement, W & D shall be compensated by ITG based on the schedule that appears on Exhibit A hereto. The parties may amend said schedule from time to time in writing and such amendment shall not affect any other term of this Agreement. 6. TERM AND TERMINATION a. The term of this Agreement shall be a period of eighteen months from the date hereof, and shall renew automatically for successive one (1) year terms unless terminated earlier in accordance with Section 6(b), 6(c), or 6(d). b. This Agreement may be terminated by either party without cause upon written notice delivered in person or by registered mail to the other party at least 180 days prior to the effective date of termination, PROVIDED, HOWEVER, that the first date on which such notice of termination may be given by either party hereto is January 1, 2000. c. This Agreement may be terminated immediately by either party if any representations or warranties cease to be true or if any duties, responsibilities or obligations are not duly performed during the term of this Agreement. Notwithstanding the foregoing, should any party choose not to exercise its right to terminate this Agreement when such a right is first available, such action shall not be deemed a waiver of such right if available on a subsequent occasion and the non-terminating party's legal and/or equitable remedies for any breach(es) of this Agreement will remain in full force and effect. d. This Agreement shall terminate automatically on the effective date of termination of the Fully-Disclosed Clearing Agreement between ITG and Jefferies & Company, Inc. without any further action by either party hereto. e. The Core Glue System Software License Agreement between ITG and W & D shall terminate automatically on the effective date of termination of this Agreement. f. Upon any termination of this Agreement for any reason whatsoever, the Supplemental Account Agreement between ITG and Jefferies & Company, Inc. relating to ITG's use of Optimark services shall terminate automatically without any further action by either party hereto. 7. NOTICE For the purpose of delivery of any notice hereunder, W & D's address shall be: W & D Securities, Inc. Harborside Financial Center Plaza III, Suite 704 Jersey City, NJ 07311 Attention: President and ITG's address shall be: ITG Inc. 380 Madison Avenue, 4th Floor New York, NY 10017 Attention: President 8. MISCELLANEOUS a. W & D agrees that it will use ITG Glue for the routing of orders placed by ITG; however, W & D shall have the right to adopt or use new or different routing technology for orders, including those placed by ITG, if W & D determines that the new technology is superior to ITG Glue. b. This Agreement shall be governed by the State of New York, without giving effect to principles of conflicts of laws. c. W & D shall provide to ITG on within 45 days of the end of W & D's first three fiscal quarters and 90 days of the end of W & D's fiscal year, W & D's balance sheet and a consolidating income statement. Such financial information shall be prepared in accordance with Exhibit B hereto. d. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors, assigns, and transferees. No assignment or amendment shall be valid unless the other party consents to such assignment or amendment in writing. Neither this Agreement nor the performance of services by W & D hereunder shall be construed to create a joint venture, partnership or agency relationship of any type between ITG and W & D. IN WITNESS WHEREOF, the parties hereto have each caused this Agreement to be executed by their duly authorized officers as of the day and year set forth above. W & D SECURITIES, INC. ITG INC. By: /s/ Donald Wiese By: /s/ Raymond L. Killian, Jr. ---------------------------- -------------------------------- Donald Wiese Raymond L. Killian, Jr. President President EX-10.2-3 7 EXHIBIT 10.2.3 FULLY DISCLOSED CLEARING AGREEMENT This Agreement, made this 1st day of January, 1999, between JEFFERIES & COMPANY, INC. (the "Clearing Broker") and ITG INC. (the "Introducing Broker"), sets forth the terms and conditions under which the Clearing Broker will provide execution and clearing services, on a fully disclosed basis, for certain customer and proprietary accounts of the Introducing Broker. I. SERVICES TO BE PROVIDED BY THE CLEARING BROKER A. Subject to the terms and conditions of this Agreement and to the Securities Act of 1933, as amended, the Securities Exchange Act of 1934, as amended (the "1934 Act"), the Investment Advisers Act of 1940, as amended, the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), Government Securities Act of 1986, as amended, or any rules or regulations thereunder, and to any other applicable law, rule or regulation, federal, state or local, including the rules of the Board of Governors of the Federal Reserve System, and to any applicable constitution, by-law, rule, regulation, or stated policy or practice of any securities exchange or nation or other regulatory or self-regulatory body or agency (collectively, the "Laws and Regulations"), the Clearing Broker will provide the following services to the Introducing Broker: 1. The Clearing Broker will provide trade clearance of executions for such customers or proprietary accounts of the Introducing Broker as have been accepted by the Clearing Broker, but only insofar as such executions are transmitted by the Introducing Broker or its authorized agents to the Clearing Broker. Authorized modes of transmission shall include electronic host-to-host, facsimile, e-mail and authorized telephonic instructions, but only as such modes of transmission are mutually agreed upon by Clearing Broker and Introducing Broker with respect to particular Customers (as defined herein). These accounts, including any syndicate account for any underwriting of which the Introducing Broker is manager, are hereinafter referred to as the "Introduced Accounts" and the beneficial owners thereof (except for Introduced Accounts that are proprietary accounts of the Introducing Broker) are hereinafter referred to as the "Customers." 2. The Clearing Broker will prepare and mail, telex or fax, as requested, confirmations and notices, and will prepare and mail monthly statements (or quarterly statements if no activity in any Introduced Account occurs during any quarter covered by such statement) directly to every Introduced Account on the Clearing Broker's forms for such purposes. 3. Unless otherwise agreed, the Clearing Broker will supply the Introducing Broker on each business day with copies of Customer confirmations, money lines, and daily commission detail reports and such other reports that the Clearing Broker has been providing Introducing Broker in the ordinary course of business. In addition to the foregoing, Clearing Broker will provide Introducing Broker with and Reference Data (as defined herein) which Clearing Broker has been providing Introducing Broker, PROVIDED, HOWEVER, that Clearing Broker may cease providing the Reference Data or make changes to the types of reference data it provides in the event that Clearing Broker is not allowed by a third-party provider of information to provide the information to a non-affiliate or changes the types of reference data which it receives. For purposes of this Section, the term "Reference Data" means the name and address of the Customer and Institution, and security master data. Unless the Introducing Broker notifies the Clearing Broker within a reasonable time (and for the purposes hereof, a period of one (1) business day after receipt of such information shall be a reasonable time) of mistakes or discrepancies in the above-described reports and information, the Clearing Broker shall be entitled to consider all such information supplied to the Introducing Broker to be correct. 4. The Clearing Broker will settle contracts and transactions in securities (including options to buy or sell securities) (i) between the Introducing Broker and other brokers and dealers, (ii) between the Introducing Broker and the Introduced Accounts of Customers, and (iii) between the Introducing Broker and persons other than Customers or other brokers and dealers. 5. The Clearing Broker will collect and pay SEC fees on behalf of the Introducing Broker. 6. The Clearing Broker will engage in all cashiering functions for the Introduced Accounts, including the receipt, delivery, borrowing, lending and transfer of securities, the making and receipt of payments therefor, the custody and safeguarding of securities and payments so received, the handling of margin accounts, the receipt and distribution of dividends and other distributions, the processing of exchange offers, rights offerings, warrants, tender offers, and redemptions, and such other functions as may be agreed upon by the parties; provided, however, that if mutually agreed to by the Introducing Broker and the Clearing Broker, cashiering functions with respect to receipt of cash and securities may be performed directly by the Introducing Broker. 7. The Clearing Broker will establish and maintain all prescribed books and records of transactions executed or cleared through it that are not specifically assigned to the Introducing Broker pursuant to the terms of this Agreement, including a stock record, and a daily record of required margin, or by the constitution, by-laws, rules, regulations, or stated policies or practices of the National Association of Securities Dealers, Inc. ("NASD") or any other securities exchange of which the Clearing Broker is a member (the "Standards"). B. The Clearing Broker shall not provide to the Introducing Broker any services that are not specifically set forth in this Agreement, including, but not limited to, the following: 1. Clearing, execution, accounting, bookkeeping or cashiering, or any other services with respect to commodities transactions, including contracts for future delivery of commodities and options on such contracts or on commodities, or any other transactions not involving securities; 2. Preparation of the Introducing Broker's payroll records, financial statements or any analysis or review thereof or any recommendations relating thereto: 3. Preparation or issuance of checks in payment of the Introducing Broker's expenses, other than expenses incurred by the Clearing Broker on behalf of the Introducing Broker pursuant to this Agreement; - 2 - 4. Payment of commission, salaries, or other remuneration to the Introducing Broker's employees; 5. Preparation and filing of reports with the Securities and Exchange Commission (the "SEC"), any state securities commission, any National Securities Exchange, or other securities exchange, the NASD or any other securities association or other regulatory or self-regulatory body or agency with which the Introducing Broker or any Introduced Account is associated or by which it is regulated, including compliance with any applicable reporting, disclosure or requirements of ERISA in respect of transactions for Introduced Accounts; provided, however, that (a) the Clearing Broker shall at the request of the Introducing Broker, promptly cooperate in providing the Introducing Broker with any necessary information and data contained in records kept by the Clearing Broker and not otherwise available to the Introducing Broker for use in Introducing Broker's preparation of such reports, and (b) the Introducing Broker shall be responsible for all costs incurred by the Clearing Broker in connection with the preparation and provision of such information. 6. Making and maintaining reports and records required to be kept by the Introducing Broker by the Currency and Foreign Transactions Reporting Act of 1970 and the regulations promulgated pursuant thereto, or any similar law or regulations enacted or adopted hereafter; 7. Verification of the address changes of any Introduced Account; 8. Obtaining, verifying, and interpreting account information, and insuring that such information meets the requirements of any "know your customer rule" of the Rules, the Standards and any other Laws and Regulations; 9. Maintaining records of personal and financial information concerning any Introduced Account and orders received therefor, and maintaining all documents and agreements executed by any Introduced Account (other than those ordinarily maintained by the Clearing Broker); 10. Holding for safekeeping the securities of any Introduced Account registered in the name of the Customer; 11. Accepting deposits from the Introducing Broker in the form of cash; or 12. Verification of changes in the identity or address of any person holding any power of attorney over any Introduced Account. C. The Clearing Broker shall limit its services pursuant to the terms of this Agreement to that of clearing functions and the related services expressly set forth herein. Neither this Agreement nor any operation hereunder shall create a general or limited partnership, association, joint venture, branch, or agency relationship between the Introducing Broker and the Clearing Broker. - 3 - D. The Clearing Broker will not be bound to make any investigation into the facts surrounding any transaction that it may have with the Introducing Broker on a principal or agency basis or that the Introducing Broker may have with its Customers or other persons, nor will the Clearing Broker be under any responsibility for compliance by the Introducing Broker with any Rules, Standards or laws and Regulations that may be applicable to the Introducing Broker or any Introduced Account. E. The Clearing Broker shall use reasonable efforts to implement a plan of contingency recovery and testing by June 30, 2000. II. CLEARING FEES, INTEREST CHARGES, AND COMMISSIONS A. The Introducing Broker agrees to pay the Clearing Broker for its services pursuant to this Agreement such amounts as are set forth in Schedule A. Said compensation schedules may be changed from time to time as may be agreed to in writing by the Introducing Broker and the Clearing Broker. The Clearing Broker will remit to the Introducing Broker 88% of the Introducing Broker's weekly gross commission revenue based on trade date sent on the second business day of the following week. Within twelve (12) business days after the trade month end, the Clearing Broker will remit to the Introducing Broker the net trade month commission balance (gross commissions, less weekly remittances, service and clearing amounts, and other charges, including amounts due the Clearing Broker by the Introducing Broker arising from any losses, liabilities, or damages in accordance with the terms of this Agreement). All remittances shall be made by the Clearing Broker to the Introducing Broker by wire transfer of immediately available funds. In the event that the Introducing Broker defaults (as defined in Article X below), the Clearing Broker shall have the right to offset any and all liabilities, costs, or expenses due it from the Introducing Broker that remain unpaid as of the date of such Event of Default against commission revenue due the Introducing Broker, the Clearing Deposit, or any other assets of the Introducing Broker then in the possession of the Clearing Broker. B. In the event that the monthly compensation otherwise payable to the Clearing Broker for its services hereunder is not greater than $10,000 in any calendar month, the Clearing Broker may deduct from the commission revenue due the Introducing Broker and/or from the Collateral Account, an amount equal to the difference between (i) $10,000, and (ii) the amount of fees mutually agreed upon by the Clearing Broker and the Introducing Broker. C. Interest income earned through charges on debit balances in any Introduced Account shall be proprietary to and fully retained by the Clearing Broker. Interest paid or credit given for any credit balances which from time to time may be left on deposit with the Clearing Broker shall be at the discretion of the Clearing Broker unless otherwise specified by Schedule A attached hereto. D. It is expressly understood and agreed that the Clearing Broker may not and will not exercise any control whatsoever over or influence in any way, the commissions, mark-ups, or other charges or expenses between the Introducing Broker and the Introduced Accounts. The Clearing Broker - 4 - shall charge each of the Introduced Accounts such commissions, mark-ups, charges, and expenses as the Introducing Broker directs, in writing; provided, however, that such commissions, mark-ups, charges, and expenses shall be implemented (i) only to the extent they are within the usual and normal capabilities of the Clearing Broker's data processing and operations systems, and (ii) only after such reasonable time as the Clearing Broker may deem necessary to avoid disruption of its normal operating capabilities. Further, the Introducing Broker shall be responsible for all costs, if any, associated with any modifications to the Clearing Broker's systems and procedures which may be necessary to accommodate the Introducing Broker. III. PROCEDURES FOR INTRODUCED ACCOUNTS A. At the time of the opening of each Introduced Account, the Introducing Broker shall supply to the Clearing Broker a new account form on such forms as the Clearing Broker will supply to the Introducing Broker (unless otherwise mutually agreed by the parties) and shall supply any other additional or supplementary documentation or information that the Clearing Broker may in its sole discretion request the Introducing Broker to obtain from the Customer, including, but not limited to, a cash account agreement on a form approved by the Clearing Broker ("Cash Account Agreement"), and all other documents that the Clearing Broker initially supplied to the Customer. If applicable, the Introducing Broker shall furnish the Clearing Broker with appropriate Alert and/or SID references for the Customer and the Clearing Broker will update such information when updates are received from Alert and/or SID. At the time of the opening of Introduced Accounts that are margin accounts, the Introducing Broker shall furnish the Clearing Broker with executed customer agreements, hypothecation and rehypothecation agreements, and consents to loans of securities on forms to be provided by the clearing broker (collectively, the "Margin Agreement"). If any Introduced Account has been opened without the Clearing Broker having previously received the foregoing information or documents, failure of the Clearing Broker to receive such information or documents shall not be deemed to be a waiver of the information or documentation requirements set forth herein. With respect to each Introduced Account that is a proprietary account, an executed Margin Agreement shall be furnished to the Clearing Broker. In addition, the terms of such Cash Account Agreement or Margin Agreement, as amended from time to time, are incorporated by reference herein. Upon the request of the Clearing Broker, the Introducing Broker shall furnish the Clearing Broker with any other additional or supplementary documents and agreements executed by the Introduced Account on forms supplied by the Clearing Broker that the Clearing Broker may require in connection with the opening, operating or maintaining of Introduced Accounts. The Clearing Broker may, at its option, mail Cash Account Agreements, Margin Agreements or other documentation directly to the Introduced Accounts upon notification by the Introducing Broker. The Introducing Broker shall promptly provide the Clearing Broker with basic data and copies of documents relating to each of the Introduced Accounts, including, but not limited to, copies of records of any receipts of the Introduced Accounts' funds or securities received directly by the Introducing Broker, as shall be necessary for the Clearing Broker to discharge its service obligations hereunder. The Clearing Broker shall provide, upon request, any documentation and agreements related to the opening and maintenance of any Introduced Accounts. - 5 - B. If the documents necessary to comply with the account documentation requirements of the Rules, Standards and Laws and Regulations have not been received by the Clearing Broker after request has been made therefor, the Clearing Broker shall give the Introducing Broker notification that no orders will be accepted (other than liquidating orders) for the Introduced Account involved. If orders are placed for such account after this notice is given, no commission credit will be granted on such orders. On receipt of the necessary documents, this restriction will be lifted with respect to future commissions, but any commissions withheld will not be credited or paid. This Agreement is not in any way intended to limit the responsibility of the Clearing Broker under the Rules, Standards, Laws and Regulations with respect to Introduced Accounts. Further, acceptance of an order after notification has been given shall not constitute a waiver of the Clearing Broker's right to reject any trade. C. All transactions in any Introduced Account are to be considered cash transactions until such time as the Clearing Broker has received and accepted Margin Agreements, duly and validly executed in respect of such Introduced Account. D. At the time of the opening of any agency Introduced Account, the Introducing Broker shall furnish the Clearing Broker with the name of any principal for whom the agent is acting and written evidence of the agent's authority. E. The Introducing Broker shall be solely and exclusively responsible for approval of all accounts and transactions therein and all similar applicable Rules, Standards, Laws and Regulations and shall specifically approve the opening of any new account before forwarding such account to the Clearing Broker as a potential Introduced Account. F. The Clearing Broker reserves the right to reject any account that the Introducing Broker may tender to the Clearing Broker as a potential Introduced Account. The Clearing Broker also reserves the right to terminate any account previously accepted by it as an Introduced Account. G. The Introducing Broker shall be solely and exclusively responsible for ensuring that its Customers shall not be minors or subject to those prohibitions existing under the Rules, Standards, Laws and Regulations generally relating to the incapacity of any Introduced Account or any conflict of interest relating to such Introduced Account. H. With respect to Introduced Accounts that are margin accounts, the Clearing Broker is responsible for compliance with Regulation T, 12 C.F.R. Part 220, promulgated by the Board of Governors of the Federal Reserve System (the "Board"), and any interpretive ruling issued by the Board, and the letter rulings of the Federal Reserve Bank of New York, Rules and interpretations of the NASD and any other applicable margin and margin maintenance requirements of the Rules, Standards, Laws and Regulations. The Introducing Broker is responsible to the Clearing Broker for the collection of the margin required to support each transaction for, and to maintain margin in, each Introduced Account, in conformity with the above margin and margin maintenance requirements. After such initial margin on each transaction has been received, maintenance margin calls shall be generated by the Clearing Broker and made by the Clearing Broker or by the Introducing Broker at the instructions of - 6 - the Clearing Broker. The Clearing Broker shall have the absolute right to modify, in its sole discretion, the margin requirements for any Introduced Account or any security position from time to time so that the Clearing Broker may call for additional margin and shall have sole discretion as to the amount of margin to be required of and maintained by Introduced Accounts. I. The Introducing Broker shall be solely and exclusively responsible for the payment and delivery of all "when issued" or "when distributed" transactions that the Clearing Broker may accept, forward, or execute for Introduced Accounts. J. The Introducing Broker agrees that all Customers of the Introducing Broker who engage in DVP transactions (and their agents) will utilize the facilities of a securities depository for the confirmation, acknowledgment, and book entry settlement of all depository eligible transactions, subject to the exceptions to Rules or Standards pertaining to "COD" or "DVP" transactions. K. To facilitate the keeping of records by the Clearing Broker, the Introducing Broker shall turn over promptly to the Clearing Broker any and all payments and securities that the Introducing Broker receives from Customers. Concurrently with the delivery of such payments or securities to the Introducing Broker, it shall furnish the Clearing Broker with such information as may be relevant or necessary to enable the Clearing Broker to record promptly and properly such payments and securities in the respective Introduced Accounts. L. On all Over-the-Counter transactions for Introduced Accounts, the Introducing Broker shall furnish the Clearing Broker with the names of the respective purchasing and selling broker-dealers (except as otherwise provided below), the names of the purchasing and selling Customers, and the wholesale and retail purchase and sale prices. When the selection of the contra broker in an Over-the-Counter transaction is left to the Clearing Broker's discretion, the Clearing Broker will assume responsibility for any failure to pay by the contra broker. When the Introducing Broker executes its own Over-the-Counter order or designates the contra broker, in the event that the Over-the-Counter contra broker fails to perform its part of the transaction, the Introducing Broker will reimburse the Clearing Broker for any loss sustained thereby. The Clearing Broker reserves the right at any time to limit the size of transactions that the Clearing Broker will accept for clearance in these circumstances. The Clearing Broker will give the Introducing Broker reasonable notice (i.e., at least 10 days' notice in most circumstances, 30 days' notice for Credit Committee limitations and whatever notice is possible in the event of regulatory or self-regulatory limitations) of such limitations. If, after the Introducing Broker has received notice of such limitation (whether notice was reasonable or not), the Introducing Broker executes an order in excess of the limit established by the Clearing Broker, the Clearing Broker shall have the right to notify the other party and other dealer that it will not accept the transaction for clearance and settlement. M. The Introducing Broker shall be solely and exclusively responsible for approving all orders for the Introduced Accounts and for establishing procedures to ensure that such approved orders are transmitted properly to the Clearing Broker for execution. The Clearing Broker reserves the right - 7 - to reject any order that the Introducing Broker may transmit to the Clearing Broker for execution or clearance. N. The Introducing Broker shall be solely and exclusively responsible for the supervisory review of all orders for the Introduced Accounts and shall ensure that any orders and instructions given by it or any of its employees to the Clearing Broker pursuant to the terms of this Agreement shall have been properly authorized in advance. O. The Introducing Broker shall be solely and exclusively responsible for making every reasonable effort to ascertain the essential facts relative to any Introduced Account and any order therefor, in compliance with "know your customer" provisions of the Rules or the Standards, including but not otherwise limited to ascertaining the authority of all orders for Introduced Accounts, and the genuineness of all certificates, papers, and signatures provided by each Introduced Account. Any investment advice furnished to an Introduced Account shall be the sole and exclusive responsibility of the Introducing Broker. P. The Introducing Broker shall be solely and exclusively responsible for review of all Introduced Accounts and for compliance with any supervisory responsibility with respect to the accounts introduced under this Agreement, including but not otherwise limited to matters involving the investment objectives of the Introduced Accounts, the suitability of the investments made by the Introduced Accounts, the reasonable basis for recommendations made to Introduced Accounts, and the frequency of trading in the Introduced Accounts, whether or not such transactions are instituted by the Introducing Broker, its partners, officers, employees or any registered investment adviser. Q. The Introducing Broker shall be solely and exclusively responsible for the handling and supervisory review of any Introduced Accounts over which the Introducing Broker's partners, officers or employees have discretionary authority, and any interpretations thereof and any other applicable Rules, Standards, Laws and Regulations. The Introducing Broker shall furnish the Clearing Broker with such documentation with respect thereto as may be requested by the Clearing Broker. The Introducing Broker hereby warrants that with regard to any orders or instructions given by the Introducing Broker with respect to such discretionary accounts, its partners, officers or employees shall have been fully and properly authorized relative thereto and that the execution of such orders shall not be in violation of the Rules, Standards, Laws and Regulations. R. The Introducing Broker shall be solely and exclusively responsible for the handling and supervisory review of any Introduced Account for an employee or officer of any member organization, self-regulatory organization, bank, trust company, insurance company, or other organization engaged in the securities business, and any other applicable Rules, Standards, Laws and Regulations. The Introducing Broker shall furnish the Clearing Broker with such documentation with respect thereto as may be requested by the Clearing Broker. S. The Introducing Broker shall be solely and exclusively responsible for ensuring that it is authorized to do business in any jurisdiction in which any Introduced Account resides or is domiciled. - 8 - T. The Introducing Broker shall be solely and exclusively responsible for compliance with any and all disclosure documents and prospectus delivery requirements in connection with Introduced Accounts that are option accounts and with any principal training or registration requirements relating to options trading in Introduced Accounts. U. The Introducing Broker and the Clearing Broker shall each be responsible for the respective compliance of each with any supervisory procedures under Rule 3010 of the NASD Manual, Conduct Rules and, to the extent applicable, any other related provisions of the Rules, Standards, Laws and Regulations including but not otherwise limited to supervising the activities and training of their respective registered representatives, as well as all of their other respective employees in the performance of functions specifically allocated to them pursuant to the terms of this Agreement. V. The Introducing Broker shall be solely and exclusively responsible for sales and purchases for the Introduced Accounts that may create or result in a violation of any of the Rules, Standards, Laws and Regulations. W. The Introducing Broker shall be solely and exclusively responsible for compliance with the Rules, Standards, Laws and Regulations in the same manner and to the same degree as if the Introducing Broker were performing the services for the Introduced Accounts that have been assumed by the Clearing Broker pursuant to this Agreement. X. The Introducing Broker shall be solely and exclusively responsible for compliance with any Rules, Standards, Laws and Regulations concerning transfers of restricted or control securities in Introduced Accounts. Securities delivered to the Clearing Broker on behalf of an Introduced Account for delivery in respect of a sale shall not be in legended form. Y. The Introducing Broker shall be solely and exclusively responsible for compliance with Rule 10b-16 under the 1934 Act; provided, however, that any document provided to Customers in connection therewith shall be approved in writing by the Clearing Broker in advance. Z. In connection with all transactions for Introduced Accounts, the Introducing Broker shall be solely responsible for compliance with all rules relating to the Small Order Execution System ("SOES") of the NASD including, without limitation, prohibitions on proprietary trading and volume restrictions. AA. All transactions heretofore had between the Introducing Broker and the Clearing Broker with respect to orders given by or for the Introduced Accounts and cleared through the Clearing Broker shall be subject to the provisions of this Agreement. BB. For purposes of the Securities and Exchange Commission's financial responsibility rules and the Securities Investor Protection Act, Introducing Broker's customers will be considered customers of Clearing Broker and not customers of Introducing Broker. Nothing herein shall cause Introducing Broker's customers to be construed or interpreted as customers of Clearing Broker for any other - 9 - purpose, or to negate the intent of any other section of the Fully Disclosed Clearing Agreement, including, but not limited to, the delineation of responsibilities as set forth elsewhere in the Fully Disclosed Clearing Agreement. IV. INFORMATION TO BE PROVIDED BY THE INTRODUCING BROKER A. The Introducing Broker shall provide the Clearing Broker with copies of the Introducing Broker's annual audited financial statements as well as copies of all financial information and reports filed by the Introducing Broker with the NASD, the SEC, and any other National Securities Exchange (where a member) (including but not otherwise limited to monthly and quarterly Financial and Operational Combined Uniform Single Reports, i.e., "FOCUS" Reports) simultaneously with the filing therewith. B. The Introducing Broker shall submit to the Clearing Broker on a monthly basis, or at more frequent intervals if so requested by the Clearing Broker, information and reports relating to the Introducing Broker's financial integrity, including but not otherwise limited to information regarding the Introducing Broker's aggregate indebtedness ratio and net capital. C. The Introducing Broker shall provide the Clearing Broker with all appropriate data in its possession pertinent to the proper performance and supervision of any function or responsibility specifically allocated to the Clearing Broker pursuant to the terms of this Agreement. D. The Introducing Broker shall provide the Clearing Broker with any amendment or supplement to the Form BD of the Introducing Broker. E. Upon the execution of this Agreement, the Introducing Broker shall provide to the Clearing Broker a written list of all securities with respect to which the Introducing Broker is a market-maker. The Introducing Broker shall give the Clearing Broker prior written notice of any proposed changes in its market-making activities, including changes in the identity of the securities for which it makes a market. The Introducing Broker shall provide the Clearing Broker on a timely basis with information sufficient to ensure that any confirmation sent to Customers by the Clearing Broker on the Introducing Broker's behalf contain correct information on the Introducing Brokers' role in the transaction. The Clearing Broker shall have the right to limit or prohibit the Introducing Broker's market-making activities with respect to any security. V. INFORMATION TO BE PROVIDED BY THE CLEARING BROKER A. The Clearing Broker shall provide the Introducing Broker with all appropriate data in its possession pertinent to the proper performance and supervision of any function specifically allocated to the Introducing Broker pursuant to the terms of this Agreement. The Introducing Broker shall be responsible for all costs incurred by the Clearing Broker in connection with the preparation and provision of such information. - 10 - B. The Clearing Broker shall provide the Introducing Broker with copies of the Clearing Broker's annual audited financial statements as well as copies of all financial information and reports filed by the Clearing Broker with the NASD, the SEC, and any other National Securities Exchange (where a member) (including but not otherwise limited to monthly and quarterly Financial and Operational Combined Uniform Single Reports, i.e., "FOCUS" Reports) simultaneously with the filing therewith. VI. COMMUNICATIONS WITH CUSTOMERS AND OTHERS A. Any new Customers of the Introducing Broker shall be provided by the Clearing Broker with a Welcome Letter, notifying the new Customer as to the general nature of the services to be provided by the Clearing Broker pursuant to this Agreement, the respective obligations of the parties hereto, and any other Customer-related responsibilities of the parties to this Agreement prior to such Customers becoming Introduced Accounts. B. The Customers shall be informed pursuant to such Welcome Letter that all inquiries and correspondence should be directed to the Introducing Broker. In the event such correspondence is not directed to the party who is responsible under the terms of this Agreement for the area to which the correspondence relates, the Introducing Broker or the Clearing Broker shall expeditiously forward such correspondence to the appropriate party which shall respond to it. C. The Clearing Broker shall carry all Introduced Accounts in the name of the Customer, with a notation on its books and records that such Introduced Accounts were introduced by the Introducing Broker, and all monthly or quarterly statements, confirmations, and notices of funds or securities due relating to such Introduced Accounts shall also indicate that the Introduced Accounts were introduced by the Introducing Broker, that the role of the Clearing Broker is that of a clearing broker only, and that the Introducing Broker will continue as broker for the Introduced Accounts. Inadvertent omission of such notations shall not be deemed to constitute a breach of this Agreement. Copies of the forms covering all of the foregoing shall be furnished by the Clearing Broker to the Introducing Broker. D. The Introducing Broker shall not, without the prior written approval of the Clearing Broker, place any advertisement in any newspaper, publication, periodical or any other media or communicate with any customer or the public in any manner whatsoever if such advertisement or communication in any manner makes reference to the Clearing Broker or any affiliate of the Clearing Broker or to the clearing arrangements and the services embodied in this Agreement. This paragraph does not limit the Introducing Broker from informing prospective clients or Customers that it has a clearing arrangement with the Clearing Broker; provided, however, that such information was specifically requested by the prospective client or Customer. E. Should the Introducing Broker in any way hold itself out as, advertise or represent that it is the agent of, affiliated with, or a branch of the Clearing Broker, the Clearing Broker shall have the power, at its option, to terminate this Agreement and the Introducing Broker shall be liable for any loss, - 11 - liability, damage, cost or expense (including but not otherwise limited to fees and expenses of legal counsel) sustained or incurred by the Clearing Broker as a result of such advertisement or representation. Notwithstanding the provisions of paragraph C of Article X below that any dispute or controversy between the parties relating to or arising out of this Agreement shall be referred to and settled by arbitration, in connection with any breach by the Introducing Broker of this paragraph, the Clearing Broker may, at any time prior to the initial arbitration hearing pertaining to such dispute or controversy, by application to the United States District Court for the Southern District of New York or the Supreme Court of the State of New York for the County of New York seek any such temporary or provisional relief or remedy ("provisional remedy") provided for by the laws of the United States of America or the laws of the State of New York as would be available in an action based upon such dispute or controversy in the absence of an agreement to arbitrate. The parties acknowledge and agree that it is their intention to have any such application for a provisional remedy decided by the court to which it is made and that such application shall not be referred to or settled by arbitration. No such application to either said court for a provisional remedy, nor any act or conduct by either party in furtherance of or in opposition to such application, shall constitute a relinquishment or waiver of any right to have the underlying dispute or controversy with respect to which such application is made settled by arbitration in accordance with paragraph C of Article XI below. VII. ERRORS, CONTROVERSIES AND INDEMNITIES A. The Clearing Broker hereby agrees to indemnify, defend and hold harmless the Introducing Broker and each person, if any, who controls the Introducing Broker within the meaning of Section 20 of the 1934 Act, from and against any and all losses, claims, damages, liabilities and expenses, including attorneys' fees and costs, arising out of the bad faith, gross negligence or criminal acts or omissions on the part of any of the Clearing Broker's directors, officers, or employees with respect to the services provided by the Clearing Broker under this Agreement. B. The Introducing Broker hereby agrees to indemnify, defend and hold harmless the Clearing Broker and each person, if any, who controls the Clearing Broker within the meaning of Section 20 of the 1934 Act from and against any and all losses, claims, damages, liabilities and expenses, including attorneys' fees and costs, arising out of one or more of the following: 1. Failure of any Introduced Account to make timely payment for the securities purchased by it or timely and good delivery of securities sold for it, the existence in any Introduced Account of any unsecured debit or unsecured short position, or the failure of any Introduced Account timely to comply with margin or margin maintenance calls (if such calls are timely made by the Clearing Broker), whether or not any margin extensions have been granted by the Clearing Broker and whether or not such extensions have been requested by the Introducing Broker; 2. Any check or draft given to the Clearing Broker by any Introduced Account being returned to the Clearing Broker unpaid or any delivery versus payment or receipt versus payment transaction being rejected by any Customer (or its agent); - 12 - 3. Failure of the Introducing Broker to properly perform its duties, obligations and responsibilities as set forth in this Agreement; provided, however, that the participation of any employee of the Clearing Broker in any transactions referred to herein shall not affect the Introducing Broker's Indemnification obligations hereunder unless such participation by such employee of the Clearing Broker was in bad faith or grossly negligent; 4. Any dishonest, fraudulent, negligent or criminal act or omission on the part of any of the Introducing Broker's officers, partners, employees, registered representatives, agents or Customers; 5. All claims or disputes between the Introducing Broker and its customers with respect to the matters set forth in this Agreement, it being understood and agreed: (A) that the Introducing Broker guarantees the validity of Customer orders in the form such orders are transmitted to the Clearing Broker by the Introducing Broker and guarantees to the Clearing Broker that each Customer will promptly and fully perform its commitments and obligations with respect to all transactions in its accounts carried by the Clearing Broker and (B) that checks received by the Clearing Broker from the Introducing Broker's Customers shall not constitute payment until the proceeds have actually been received and credited to the Clearing Broker by its bank; 6. Any adverse claims with respect to any Customer securities delivered to or cleared by the Clearing Broker, it being understood and agreed that the clearing Broker shall be deemed to be an intermediary between the Introducing Broker and its Customers, and the Clearing Broker shall be deemed to make no representations or warranties other than as provided in Section 8-306(3) of the Uniform Commercial Code; 7. The default by any over-the-counter contra broker with whom the Introducing Broker deals on a principal basis, giving the Clearing Broker for clearance; 8. The default by any third-party contra broker with whom the Introducing Broker rather than the Clearing Broker executes a transaction for itself or a Customer; 9. A claim by any third-party or contra broker arising out of the Clearing Broker's rejection of any transaction pursuant to Article III of this Agreement; 10. The breach by the Introducing Broker of any representation or warranty made by it under this Agreement; 11. The Clearing Broker's guarantee of any signatures with respect to transactions in the accounts of any customers; and 12. The failure of any Customers to fulfill their obligations to the Introducing Broker or to the Clearing Broker, whether or not such failure is within the Introducing Broker's control. - 13 - C. In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity may be sought pursuant to this Article VII, such person (hereinafter called the indemnified party) shall promptly notify the person against whom such indemnity may be sought (hereinafter called the indemnifying party) in writing and the indemnifying party, upon request of the indemnified party, shall retain counsel satisfactory to the indemnified party to represent the indemnified party. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm (in addition to any local counsel) for all such indemnified parties, and that all such fees and expenses shall be reimbursed as they are incurred. The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated in this Section, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (1) such settlement is entered into more than thirty (30) days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement of any pending or threatened proceeding in respect of which any indemnified party is or could have been a party and indemnity could have been sought hereunder by such indemnified party, unless such settlement includes an unconditional release of such indemnified party from all liability on claims that are the subject matter of such proceeding. D. The indemnification provisions in this Article VII, and the indemnification provisions embodied within Article III hereof, shall remain operative and in full force and effect, regardless of the termination of this Agreement, and shall survive any such termination. E. In no event shall the Clearing Broker be responsible to the Introducing Broker, to any of its Customers or to any other person for indirect or consequential damages arising out of any actual or alleged failure by the Clearing Broker to perform the functions or provide the services to the Introducing Broker required by this Agreement, even if notified of the possibility thereof. The Clearing Broker's sole responsibility and liability for any such actual or alleged failure will be to the Introducing Broker and only to the extent expressly provided by this Agreement. VIII. ADDITIONAL REPRESENTATIONS AND WARRANTIES A. The Introducing Broker represents, warrants, and covenants as follows: 1. The Introducing Broker shall (a) maintain at all times a net capital computed in accordance with Rule 15c3-1 of the 1934 Act of at least $100,000 except during periods when it is in an underwriting syndicate, when it shall have not less than $1,000,000 of net capital and (b) immediately notify the Clearing Broker when (i) its net capital is less than the amount set forth in (a) - 14 - above, (ii) its Aggregate Indebtedness Ratio reaches or exceeds 10 to 1, or (iii) if the Introducing Broker has elected to operate under paragraph (f) of Rule 15c3-1, when its net capital is less than 5% of aggregate debit items computed in accordance with Rule 15c3-3. 2. The Introducing Broker is a member in good standing of the NASD. The Introducing Broker agrees to promptly notify the Clearing Broker of any additional exchange memberships or affiliations. The Introducing Broker shall also comply with whatever non-member access rules have been promulgated by any National Securities Exchange or any other securities exchange of which it is not a member. 3. The Introducing Broker is and during the term of this Agreement will remain duly registered or licensed and in good standing as a broker-dealer under all applicable laws and Regulations. 4. The Introducing Broker has all the requisite authority in conformity with all applicable Rules to enter into this Agreement and to retain the services of the Clearing Broker in accordance with the terms hereof and has taken all necessary action to authorize the execution of this Agreement and the performance of the obligations hereunder. 5. The Introducing Broker is in compliance, and during the term of this Agreement will remain in compliance with (i) the capital and financial reporting requirements of every National Securities Exchange or other securities exchange and/or securities association of which it is a member, (ii) the capital requirements of the SEC, and (iii) the capital requirements of every state in which it is licensed as a broker-dealer. 6. The Introducing Broker shall keep confidential any confidential information the Introducing Broker may acquire as a result of this Agreement regarding the business and affairs of the Clearing Broker, which requirement shall survive the life of this Agreement. 7. The Introducing Broker warrants and represents that all transactions introduced to the Clearing Broker on behalf of an Introduced Account are authorized by the Introduced Account. 8. All orders or transactions for Introduced Accounts shall comply in all respects with the Laws, Regulations, Rules and Standards. 9. The Introducing Broker shall not generate and/or prepare any statements, bills, or confirmations respecting any Introduced Account unless expressly authorized to do so in writing by the Clearing Broker. 10. The Introducing Broker shall maintain a $250,000 blanket brokers bond insurance policy covering any and all acts of its employees, agents, and partners to protect and indemnify the Clearing Broker against any loss, liability, damage, cost or expense (including but not - 15 - otherwise limited to fees and expenses of legal counsel) that the Clearing Broker may suffer or incur, directly or indirectly, as a result of any act of the Introducing Broker's employees, agents, or partners. 11. The Introducing Broker agrees that the Clearing Broker shall be its only clearing agent and that all transactions, in any customer or proprietary account serviced by the Introducing Broker, shall be cleared exclusively through the Clearing Broker. B. The Clearing Broker represents, warrants, and covenants as follows: 1. The Clearing Broker is a member in good standing of the NASD. 2. The Clearing Broker is and during the term of this Agreement will remain duly licensed and in good standing as a broker-dealer under all applicable laws and Regulations. 3. The Clearing Broker has all the requisite authority, in conformity with all applicable Rules, Standards, Laws and Regulations to enter into and perform this Agreement and has taken all necessary action to authorize the execution of this Agreement and the performance of the obligations hereunder. 4. The Clearing Broker is in compliance, and during the term of this Agreement will remain in compliance with (i) the capital and financial report reporting requirements of every National Securities Exchange and/or other securities exchange or association of which it is a member, (ii) the capital requirements of the SEC, and (iii) the capital requirements of every state in which it is licensed as a broker-dealer. 5. The Clearing Broker represents and warrants that the names and addresses of the customers of the Introducing Broker that have or may come to its attention in connection with the clearing and related functions it has assumed under this Agreement are confidential and shall not be utilized by the Clearing Broker except in connection with the functions performed by the Clearing Broker pursuant to this Agreement. Notwithstanding the foregoing, should an Introduced Account request, on an unsolicited basis, that the Clearing Broker become its broker, acceptance of such Introduced Account by the Clearing Broker shall in no way violate this representation and warranty, nor result in a breach of this Agreement. 6. The Clearing Broker shall keep confidential any confidential information it may acquire as a result of this Agreement regarding business and affairs of the Introducing Broker, which requirement shall survive the life of this Agreement. IX. TERM Subject to the provisions of Article X hereof, the term of this Agreement shall be a period of eighteen months from the date hereof, and shall renew automatically for successive one (1) year terms unless terminated in accordance with Article X hereof. - 16 - X. TERMINATION A. Notwithstanding any provision of this Agreement, the following events or occurrences shall constitute an Event of Default under this Agreement: 1. Either party hereto shall fail to perform or observe any term, covenant, or condition to be performed hereunder (including, but not limited to, any representation, warranty, or covenant relating to net capital requirements) and such failure shall continue to be unremedied for a period of ten (10) days after receipt of written notice from the nondefaulting party to the defaulting party specifying the failure and demanding that the same be remedied; or 2. Any representation or warranty made by either party hereto shall prove to be incorrect at any time in any material respect; or 3. A receiver, liquidator, or trustee of either party hereto or of any property held by either party, is appointed by court order and such order remains in effect for more than 30 days; or either party is adjudicated bankrupt or insolvent; or a substantial amount of property of either party is sequestered by court order and such order remains in effect for more than 30 days; or a petition is filed against either party under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, and is not dismissed within 30 days after such filings; or 4. Either party hereto files a petition in voluntary bankruptcy or seeks relief under any provision of any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, dissolution or liquidation law of any jurisdiction, whether now or hereafter in effect, or consents to the filing of any petition against it under any such law; or 5. Either party hereto makes an assignment for the benefit of its creditors, or admits in writing its inability to pay its debts generally as they become due, or consents to the appointment of a receiver, trustee or liquidator of either party, or of any property held by either party; or 6. Either party hereto is enjoined, disabled, suspended, prohibited, or otherwise unable to engage in the securities business as a result of any administrative or judicial proceeding or action by the SEC, any state securities law administrator, any National Securities Exchange, or any self-regulatory organization having jurisdiction over that party. B. Upon the occurrence of any such Event of Default, the nondefaulting party may, at its option, by notice to the defaulting party declare that this Agreement shall be thereby terminated and such termination shall be effective as of the date such notice has been communicated to the defaulting party, If the Introducing Broker defaults, the Clearing Broker shall have sole discretion to determine what orders, if any, it shall accept for any Introduced Account, and shall in addition to all rights it has under this Agreement, have all rights granted to it under the Cash Account Agreement and Margin - 17 - Agreement incorporated by reference herein. In such event, the Clearing Broker shall be entitled, upon the consent of the Customer, to accept instructions directly from the Customer. C. This Agreement may be canceled by either of the parties hereto upon 180 days' written notice to the other, provided, however, that the first date such written notice may be given is January 1, 2000. D. This Agreement shall terminate automatically on the effective date of termination of the Execution Agreement between the Introducing Broker and W & D, Inc. without any further action by either party hereto. E. Upon any termination of this Agreement for any reason whatsoever, the Supplemental Account Agreement between the Clearing Broker and the Introducing Broker relating to the Introducing Broker's use of Optimark services shall terminate automatically without any further action by either party hereto. XI. MISCELLANEOUS A. This Agreement supersedes any previous agreement and may be modified only by a writing signed by both parties to this Agreement. Such modification shall not be deemed to be a cancellation of this Agreement. B. This Agreement shall be submitted to and/or approved by any National Securities Exchange, or other regulatory and self-regulatory bodies vested with the authority to review and/or approve this Agreement or any amendment or modifications hereof. In the event of any such disapproval, the parties hereto agree to bargain in good faith to achieve the requisite approval. C. Any dispute or controversy between the Introducing Broker and the Clearing Broker relating to or arising out of their relationship or this Agreement shall be settled by arbitration before and under the Code of Arbitration Procedures of the NASD, unless the transaction which gave rise to such dispute or controversy was effected in another exchange or market which provides arbitration facilities, in which case it shall be settled by arbitration under such facilities. D. This Agreement shall be binding upon all successors, assigns or transferees of both parties hereto, irrespective of any change with regard to the name of or the personnel of the Introducing Broker or the Clearing Broker. Any assignment of this Agreement shall be subject to the requisite review and/or approval of any regulatory or self-regulatory agency or body whose review and/or approval must be obtained prior to the effectiveness and validity of such assignment. No assignment of this Agreement by the Introducing Broker shall be valid unless the Clearing Broker consents to such an assignment in writing. Any assignment by the Clearing Broker to any subsidiary that it may create or acquire or controlled directly or indirectly by the Clearing Broker will be deemed valid and enforceable in the absence of any consent from the Introducing Broker. Neither this Agreement nor any operation hereunder is intended to be, shall not be deemed to be, and shall not be treated as a general - 18 - or limited partnership, association or joint venture or agency relationship between the Introducing Broker and the Clearing Broker. E. The construction and effect of every provision of this Agreement, the rights of the parties hereunder and any questions arising out of the Agreement, shall be subject to the statutory and common law of the State of New York without reference to the conflict of law provisions thereof. F. The headings preceding the text, articles, and sections hereof have been inserted for convenience and reference only and shall not be construed to affect the meaning, construction, or effect of this Agreement. G. This Agreement shall cover only the types of services set forth herein and is in no way intended nor shall it be construed to bestow upon the Introducing Broker any special treatment regarding any other arrangements, agreements or understandings that presently exist or which may hereafter exist between the Introducing Broker and the Clearing Broker and any affiliate or the Clearing Broker. The Introducing Broker shall be under no obligation whatsoever to deal with the Clearing Broker or any of its subsidiaries or any companies controlled directly or indirectly by or affiliated with the Clearing Broker, in any capacity other than as set forth in this Agreement. Similarly, the Clearing Broker shall be under no obligation whatsoever to deal with the Introducing Broker or any of its affiliates in any capacity other than as set forth in this Agreement. H. If any provision or condition of this Agreement shall be held to be invalid or unenforceable by any court, or regulatory or self-regulatory agency or body, such invalidity or unenforceability shall attach only to such provision or condition. The validity of the remaining provisions and conditions shall not be affected thereby and this Agreement shall be carried out as if any such invalid or unenforceable provision or condition were not contained herein. I. The enumeration herein of specific remedies shall not be exclusive of any other remedies. Any delay or failure by any party to this Agreement to exercise any right, power, remedy or privilege herein contained, or now or hereafter existing under any applicable statute or law, shall not be construed to be a waiver of such right, power, remedy or privilege or to limit the exercise of such right, power, remedy or privilege. No single, partial or other exercise of any such right, power, remedy or privilege shall preclude the further exercise thereof or the exercise of any other right, power, remedy or privilege. J. All notices, consents, directions, approvals, restrictions, requests, or other communications required or permitted to be delivered hereunder shall be given to the parties hereto, effective upon delivery, as follows: If to the Clearing Broker: Jefferies & Company, Inc. 11100 Santa Monica Boulevard 11th Floor Los Angeles, CA 90025 - 19 - Attention: Jerry M. Gluck, Esq. If to the Introducing Broker: ITG Inc. 380 Madison Avenue 4th Floor New York, NY 10017 Attention: Timothy H. Hosking Either party may change its address for notice purposes by giving written notice pursuant to registered mail of the new address to the other party. Termination shall not affect any of the rights and liabilities of the parties hereof incurred before the date of receipt of such notice of termination. K. The Clearing Broker shall not be liable for any loss caused, directly or indirectly, by government restrictions, exchange or market rulings, suspension of trading, war, strikes or other conditions beyond the control of the Clearing Broker. In the event that any communications network, data processing system, or computer system used by the Clearing Broker or by the Introducing Broker, whether or not owned by the Clearing Broker, is rendered inoperable, the Clearing Broker shall not be liable to the Introducing Broker for any loss, liability, claim, damage or expense resulting, either directly or indirectly, therefrom. L. The Clearing Broker shall have the right to investigate, or arrange for an appropriate party to investigate, the Introducing Broker's credit. Nothing in this paragraph shall be construed to relieve the Introducing Broker of its obligation to oversee its financial integrity. M. Without the prior written consent of the Clearing Broker, the Introducing Broker will not during the period of this Agreement and for one year following its termination, hire or attempt to hire any person who is employed by the Clearing Broker or whose employment with the Clearing Broker terminated within the one-year period prior to the termination of this Agreement. Made and executed at New York, New York, on the date first hereinabove set forth. ITG INC. JEFFERIES & COMPANY, INC. By: /S/ RAYMOND L. KILLIAN, JR. By: /S/ CLARENCE T. SCHMITZ ------------------------------ ------------------------------ Raymond L. Killian, JR. . Clarence T. Schmitz Chairman, Chief Executive Executive Vice President Officer and President - 20 - EX-10.2-4 8 EXHIBIT 10.2.4 APPENDIX C BENEFITS AGREEMENT BENEFITS AGREEMENT ("Agreement") dated as of March 17, 1999 by and between Jefferies Group, Inc., a Delaware corporation ("JEFG"), and JEF Holding Company, Inc. a Delaware corporation and a wholly owned subsidiary of JEFG ("Holding"). RECITALS WHEREAS, the Board of Directors of JEFG has approved the business transactions pursuant to which all the assets, businesses and Liabilities (as defined below) of Investment Technology Group, Inc., a Delaware corporation and approximately 80.5% owned subsidiary of JEFG ("ITGI"), and ITGI's subsidiaries will be separated from all other assets, businesses and Liabilities of JEFG, on the terms and subject to the conditions set forth herein and in the Ancillary Agreements (as defined below); WHEREAS, concurrently herewith, JEFG and ITGI are entering into an Agreement and Plan of Merger (the "MERGER AGREEMENT"), pursuant to which (x) ITGI will merge (the "MERGER") with and into JEFG and (y) all outstanding shares of common stock, par value $0.01 per share, of ITGI (the "ITGI COMMON STOCK") will be canceled or converted into the right to receive shares of common stock, par value $0.01 per share, of JEFG (the "JEFG COMMON STOCK") in the manner set forth in the Merger Agreement; WHEREAS, prior to the Distribution (defined below) and Merger (x) JEFG will transfer to Holding (or to JEFCO, defined herein, prior to the time JEFCO becomes a subsidiary of Holding in connection with the Contribution, defined below), and Holding and JEFCO will accept from JEFG, all of the Assets of JEFG other than JEFG's ownership interest in capital stock of ITGI (the "CONTRIBUTION"), and JEFG will assign to Holding (or to JEFCO, as appropriate), and Holding and JEFCO will assume from JEFG, all of the Holding Liabilities (as defined herein) (individually, the "ASSUMPTION" and together with the Contribution, collectively, the "TRANSFERS"), and (y) following the Transfers and the satisfaction of all conditions set forth in Section 2.02 of this Agreement, all of the common stock of Holding, par value $0.0001 per share ("HOLDING COMMON STOCK"), will be distributed (the "DISTRIBUTION") to JEFG's stockholders at the rate of one share of Holding Common Stock for each share of JEFG Common Stock outstanding as of April 20, 1999, or such other date as is designated by JEFG's Board of Directors as the record date for determining the stockholders of JEFG entitled to receive the Distribution (the "RECORD DATE"); WHEREAS, (i) pursuant to the Merger, the name of Jefferies Group, Inc. (as the surviving corporate entity in the Merger) will be changed to Investment Technology Group, Inc. and (ii) following the consummation of the Distribution and the Merger, the name of JEF Holding Company, Inc. will be changed to Jefferies Group, Inc.; WHEREAS, it is intended that the Distribution not be taxable to JEFG or its stockholders pursuant to Section 355 of the Internal Revenue Code of 1986, as amended (the "CODE"); WHEREAS, prior to the Distribution, ITGI will declare and, subject to the approval and adoption of the Merger Agreement and the Merger by the stockholders of JEFG and ITGI and the satisfaction or waiver of all other conditions to the Merger as set forth in the Merger Agreement, pay a cash dividend in an amount equal to $4.00 per share to all holders of ITGI Common Stock, including JEFG (the "SPECIAL ITGI CASH DIVIDEND"); C-1 NOW, THEREFORE, in consideration of the foregoing premises and the mutual agreements and covenants contained in this Agreement, the parties hereby agree as follows: ARTICLE I DEFINITIONS Section 1.01. DEFINITIONS. Capitalized terms used herein without definition have the meanings given to them in the Distribution Agreement. As used herein, the following terms have the following meanings: "ERISA" means the Employee Retirement Income Security Act of 1974, as amended. "HOLDING EMPLOYEE" means (i) any person who was an employee immediately prior to the Effective Time of any member of the JEFG Group (other than any member of the ITGI Group), including any such employee who is absent from work at the Effective Time on account of sick leave, short-term or long-term disability or leave of absence, but excluding any such employee designated by Holding and ITGI as remaining an employee of a member of the JEFG Group following the Effective Time; (ii) any employee of any member of the Holding Group (whether before or after the Effective Time); and (iii) any former employee of any member of the JEFG Group (other than any member of the ITGI Group). "HOLDING GROUP" means Holding and its subsidiaries. "ITGI GROUP" means ITGI and its subsidiaries. "JEFG EMPLOYEE" means (i) any employee of any member of the ITGI Group, including any such employee who is absent from work on account of sick leave, short-term or long-term disability or leave of absence; (ii) any person who was an employee immediately prior to the Effective Time of any other member of the JEFG Group and who is designated by Holding and ITGI as remaining an employee of a member of the JEFG Group following the Effective Time; and (iii) any former employee of any member of the ITGI Group. "JEFG GROUP" means JEFG and its subsidiaries, excluding any member of the Holding Group. ARTICLE II EMPLOYEES AND ALLOCATION OF LIABILITIES Section 2.01. ALLOCATION OF EMPLOYEE LIABILITIES. (a) As of the Effective Time, Holding shall assume, retain and be liable for all wages, salaries, welfare, pension, incentive compensation and other employee-related liabilities and obligations ("EMPLOYEE LIABILITIES") with respect to Holding Employees, except as specifically provided otherwise in this Agreement. JEFG shall assume, retain and be liable for Employee Liabilities with respect to JEFG Employees, except as specifically provided otherwise in this Agreement. Section 2.02. OFFER OF EMPLOYMENT; BENEFIT PLAN COVERAGE. (a) Holding shall offer all Holding Employees (other than those described in clause (iii) of the definition thereof) employment with the Holding Group as of the Effective Time. As of the Effective Time, all such Holding Employees shall cease to be employees of the JEFG Group. (b) Holding Employees shall not continue to be participants in benefit plans maintained by the JEFG Group on or after the Effective Time and, instead, shall be eligible to participate in applicable Holding plans, as determined by Holding, as of the Effective Time. Holding shall treat service of each Holding Employee with the JEFG Group before the Effective Time as if such service had been with C-2 Holding for purposes of determining eligibility to participate, eligibility for benefits, benefit forms and vesting under plans maintained by Holding. Section 2.03. ADMINISTRATION. Holding and JEFG shall each make its appropriate employees and data regarding employee benefit coverage available to the other at such reasonable times as may be necessary for the proper administration by the other of any and all matters relating to employee benefits and worker's compensation claims affecting its employees. Prior to the Effective Time and for any period of time during which Holding is administering any employee benefit plans for the benefit of JEFG Employees, ITGI shall continue to pay to Holding such amounts for administrative services as it was paying for such purpose as of the date of execution of this Agreement. ARTICLE III PROFIT SHARING, EMPLOYEE STOCK OWNERSHIP AND PENSION PLANS Section 3.01. PROFIT SHARING PLAN. (a) As of the Effective Time, the Jefferies Group, Inc. Employees' Profit Sharing Plan (the "JEFG PSP") shall be transferred to and maintained by, and all liability relating thereto shall be assumed by, Holding. Prior to the Effective Time, JEFG will amend the JEFG PSP to fully vest the accounts of all participants who are active employees on December 31, 1998 as of that date and to provide for the cessation of further benefit accruals in the plan by JEFG Employees as of December 31, 1998. JEFG shall reimburse Holding for any contribution made subsequent to the end of the plan year of the JEFG PSP ending November 30, 1998 to the extent that such contribution is allocated to JEFG Employees, including any such contribution allocated to JEFG Employees for the month of December of 1998. Such reimbursement by JEFG shall be made to Holding no later than 30 days following the date on which Holding makes the contribution to the JEFG PSP for the year ending November 30, 1998. Contributions to the JEFG PSP for the plan year ending November 30, 1998 shall be based on calendar year 1998 combined profits of Holdings and ITGI. (b) As soon as practical following the date the final contribution for the plan year ending November 30, 1998 is made to the JEFG PSP, and except as provided below, assets of the JEFG PSP equal to the aggregate account balances of the JEFG Employees under the JEFG PSP (including contributions accrued through December 31, 1998) shall be transferred to, at ITGI's election, (x) a defined contribution plan and trust (the "ITG PSP") maintained by a member of the JEFG Group intended to be qualified under Sections 401 and 501 of the Code and providing for salary reduction contributions pursuant to Section 401(k) of the Code or (y) the ITGI ESOP (as defined below). The transfer to the ITGI PSP shall be made in cash or notes evidencing plan loans to JEFG Employees and the transfer to the ITGI ESOP shall be made in JEFG common stock or Holdings common stock. Any outstanding balances of plan loans to JEFG Employees shall be transferred with the underlying accounts. The account balances of the JEFG Employees shall be valued as of the date immediately preceding the date on which the transfer is made, which value shall include the earnings, gains and losses, appreciation and depreciation of the investment funds in which the accounts are invested through the date immediately preceding the date on which the transfer is made. Notwithstanding any provision of this Agreement to the contrary, Holding and the JEFG PSP shall remain responsible for providing any unpaid benefits accrued under the JEFG PSP for former JEFG Employees who have outstanding plan loans from the JEFG PSP as of the date of transfer of the account balances, and neither JEFG nor ITGI shall be responsible for any administrative expenses relating thereto. (c) Pending the transfer of assets to the ITG PSP, Holding will administer the JEFG PSP in accordance with the terms of the plan, ERISA and the Code, and will make distributions to JEFG Employees on the basis of their employment status with the JEFG Group. In addition, pending the transfer of assets to the ITG PSP, JEFG Employees shall have the ability to direct the investment of C-3 their accounts under the JEFG PSP in the same manner as they had immediately prior to the Effective Time. Loans from the JEFG PSP to JEFG Employees which are outstanding during the period from January 1, 1999 through the date of transfer of assets to the ITG PSP shall be serviced by having ITGI make applicable payroll deductions which shall be forwarded to Holding, as plan administrator, for payment to the JEFG PSP. As soon as practicable after the date hereof, Holding will provide to ITGI a list of such plan loans to JEFG Employees outstanding as of December 15, 1998, including the outstanding loan balances as of December 31, 1998 and a list of the remaining scheduled loan repayments for each such JEFG Employee. Holding and ITGI shall jointly administer the loan provisions of the JEFG PSP as applied to the JEFG Employees for the period from January 1, 1999 through the date of transfer of assets to the ITG PSP. Section 3.02. EMPLOYEE STOCK OWNERSHIP PLAN. (a) As of the Effective Time, the Jefferies Group, Inc. Employee Stock Ownership Plan (the "JEFG ESOP") shall be transferred to and maintained by, and all liability relating thereto shall be assumed by, Holding. Prior to the Effective Time, JEFG will amend the JEFG ESOP to provide that all participants who are active employees on December 31, 1998 shall be fully vested in their accounts as of the Effective Time. Participation in the JEFG ESOP by JEFG Employees shall continue until the Effective Time. (b) Following the date of consummation of the Transactions, the parties hereto currently expect that the Holding Common Stock held by the JEFG ESOP for the account of JEFG Employees will be exchanged to the extent possible for JEFG Common Stock held for the account of Holding Employees and that the exchange will occur within approximately ninety days after the Effective Time. Unless the parties hereto mutually agree otherwise, the price at which any such exchange shall occur shall be based upon the average respective closing prices of JEFG Common Stock and Holding Common Stock for the ten trading days ending on the date before the day on which the exchange occurs. Any remaining JEFG Common Stock held in the accounts of Holding Employees shall be sold at such time or times as is deemed prudent under ERISA and the cash proceeds received from such sale shall be credited to such accounts. (c) As soon as practical following the Effective Time, an employee stock ownership plan and trust (the "ITG ESOP") shall be established by a member of the JEFG Group intended to be qualified under Sections 401 and 501 of the Code and assets of the JEFG ESOP equal to the aggregate account balances of the JEFG Employees under the JEFG ESOP shall be transferred to the ITG ESOP. The transfer shall be made in cash, Holding Common Stock and JEFG Common Stock according to the investment of each JEFG Employee's account as of the date on which the transfer is made. The account balances of the JEFG Employees shall be valued as of the date on which the transfer is made, which value shall include the earnings, gains and losses, appreciation and depreciation of the investments in which the accounts are invested through the date on which the transfer is made. Pending the transfer of the assets to the ITGI ESOP, Holding will administer the JEFG ESOP in accordance with the terms of the plan, ERISA and the Code, and will make distributions to JEFG Employees at such time as their employment might terminate with the JEFG Group. Section 3.03. PENSION PLAN. As of the Effective Time, the Jefferies Group, Inc. Employees Pension Plan (the "JEFG PENSION PLAN") shall be transferred to and maintained by, and all liability relating thereto shall be assumed by, Holding. JEFG Employees shall participate in the JEFG Pension Plan and accrue benefits under the plan through February 15, 1999. Prior to the Effective Time, JEFG will amend the JEFG Pension Plan in the manner set forth in Exhibit A. Holding shall submit the JEFG Pension Plan, as amended as set forth in Exhibit A, to the Internal Revenue Service for a determination as to its qualification under Section 401(a) of the Code as soon as possible following the date hereof, but in no event later than March 15, 1999. As soon as practicable following receipt by Holding of a favorable determination letter from the Internal Revenue Service with respect to the C-4 JEFG Pension Plan, as amended in the manner set forth in Exhibit A and including the provision for lump sum distributions to JEFG Employees, JEFG Employees shall be allowed to receive distributions, including lump sum distributions, of their entire benefit under the JEFG Pension Plan in accordance with the terms of the JEFG Pension Plan, as amended as set forth in Exhibit A. Following the Effective Time and the receipt by Holdings of the favorable Internal Revenue Service determination letter referred to above and approximately two weeks prior the date benefits are expected to be payable to all JEFG Employees from the JEFG Pension Plan, JEFG will pay to the JEFG Pension Plan an amount, computed as set forth below, in order to pay for the underfunding of the JEFG Pension Plan allocable to JEFG Employees for benefits accrued through December 31, 1998. First, the lump sum equivalent of all benefits accrued as of January 1, 1999 under the JEFG Pension Plan, as amended as set forth in Exhibit A, will be calculated for all participants using a discount rate equal to 5.25%, compounded annually (the GATT interest rate for November, 1998) and the mortality table described in Rev. Rul. 95-6. The "JEFG LIABILITY PERCENTAGE" will then be determined by dividing the aggregate lump sum value of the accrued benefits, as so computed as of January 1, 1999, of the JEFG Employees by the total of the aggregate lump sum value of all such accrued benefits as so computed for all participants. The amount of the payment which JEFG is required to make to the JEFG Pension Plan pursuant to this Section 3.03(a) will be the total of the following: (i) the total benefit due the JEFG Employees, calculated as of the date of actual distribution (using the GATT interest rate in effect for November of the plan year immediately prior to the year benefits are actually distributed and the mortality table described in Rev. Rul. 95-6), less (ii) the actual value of the assets of the JEFG Pension Plan as of the last day of the month in which the determination letter referred to above is received from the Internal Revenue Service (as such value is reported by the trustee of the JEFG Pension Plan) multiplied by the JEFG Liability Percentage, less (iii) the amount of the benefits accrued by JEFG Employees between January 1, 1999 and February 15, 1999, determined as set forth in clause (i) above, plus (iv) interest for 30 days on such resulting amount (the clause (i) amount less the amounts of clauses (ii) and (iii)) at the GATT interest rate in effect at the time of such calculation. Holding shall administer the payment of such distributions in accordance with the terms of the JEFG Pension Plan, ERISA and the Code. The entire accrued benefit under the JEFG Pension Plan of each JEFG Employee who is actively employed on December 31, 1998 shall be fully vested as of December 31, 1998. In the event the Internal Revenue Service, as a condition to issuing a favorable determination letter, requires Holding to revise the amendment set forth in Exhibit A so as to modify the distribution provisions to JEFG Employees, including any modification that would eliminate the payment of lump sum distributions to JEFG Employees prior to the time they separate from service with JEFG, distributions shall be made to JEFG Employees only in accordance with the JEFG Pension Plan as it may be amended to secure the favorable determination letter. Section 3.04. ASSUMPTION OF LIABILITIES UPON TRANSFER OF PLAN ASSETS; FILINGS. (a) Effective on the date of the transfer of assets of the JEFG PSP and the JEFG ESOP to the ITG PSP and/or the ITG ESOP, (i) JEFG and its applicable benefit plan shall assume all liabilities to pay benefits in connection with the transferred assets, and (ii) Holding shall have no further liability to pay benefits with respect to the assets and liabilities that are transferred. On and after the date of such transfer, the JEFG Group shall have no liability with respect to Holding's pension, employee stock ownership and profit sharing plans, and Holding shall have no liability with respect to JEFG's employee stock ownership and profit sharing plans. (b) Holding and JEFG shall make the appropriate filings required under the Code or ERISA in connection with the transfers described in this Article III in a timely manner. The parties agree that the transfers described in Sections 3.01 and 3.02 shall be made in accordance with Section 414(l) of the Code. (c) JEFG shall submit to the Internal Revenue Service requests for favorable determination letters with respect to the tax-qualified status of the ITG PSP, if adopted, and the ITG ESOP as soon as C-5 practicable after the Effective Time, and JEFG shall make such amendments to the plans as may be required by the Internal Revenue Service in order for JEFG to receive favorable determination letters with respect to the plans. ARTICLE IV STOCK OPTION AND OTHER EQUITY-BASED COMPENSATION PLANS Section 4.01. EMPLOYEE STOCK OPTION PLANS. Holding shall be responsible for all liabilities relating to stock options granted by JEFG prior to the Effective Time. Section 4.02. CAP AND EMPLOYEE STOCK PURCHASE PLANS. (a) JEFG shall accelerate vesting in the matching contributions to its Employee Stock Purchase Plan and distribute the JEFG Common Stock in this plan to participants prior to the Effective Time. Holding shall be responsible for all liability under the JEFG Employee Stock Purchase Plan. (b) The disposition of the nonqualified deferred compensation plan of JEFG (the "CAPITAL ACCUMULATION PLAN FOR KEY EMPLOYEES") shall be as described in the Unanimous Written Consent of the Board of Directors of JEFG adopted as of January 13, 1999 (a copy of which is attached as Exhibit B). ARTICLE V OTHER EMPLOYEE PLANS Section 5.01. WELFARE BENEFIT PLANS. (a) As of the Effective Time, Holding shall assume all liability under and with respect to all welfare benefit plans maintained by JEFG, including, without limitation, medical, health, disability, accident, life insurance, death, dental and other benefit plans or arrangements and such plans shall be transferred to, and maintained by, Holding. Effective January 1, 1999, ITGI established welfare benefit plans for eligible JEFG Employees, which provide medical, health, disability, accident, life insurance, death, dental or other benefits. (b) (i) JEFG shall be liable for all employee health (including, without limitation, medical and dental), life insurance (including, without limitation, disability waiver of premium claims and any other life insurance disability claims) and long-term disability claims, and any other welfare benefit claims, and any expenses related thereto, ("WELFARE CLAIMS") that are incurred on or after January 1, 1999 with respect to JEFG Employees and their beneficiaries and dependents. (ii) Holding shall be liable for all Welfare Claims that are incurred on, after or before the Effective Time with respect to Holding Employees and their beneficiaries and dependents. (iii) If either party pays any welfare benefit claims that are a liability of the other party, the responsible party shall reimburse the paying party for all such payments. (c) For purposes of this Section 5.01, a health benefit claim is incurred when the medical services are rendered, and a life insurance claim is incurred when the covered person dies. A claim for a hospital admission shall be deemed to have been incurred on the date of admission to the hospital and shall continue for the duration of that period of hospital confinement; costs for all services provided during that period of hospital confinement shall be included in the claim. A long-term disability claim shall be deemed to have been incurred on the date the condition causing the disability rendered the employee disabled, as determined by the committee or plan administrator making the determination; costs for all long-term disability benefits relating to the claim shall be included in the claim. C-6 (d) Holding shall be liable for any health care continuation obligations under Section 4980B of the Code and Section 601 through 608 of ERISA with respect to Holding Employees and former Holding Employees and persons who are "qualified beneficiaries" (as that term is used in Section 4980B of the Code) of such employees. (e) The Distribution shall not be considered an event entitling any employee to salary continuation or other severance benefits. Section 5.02. VACATION PAY AND SIMILAR ITEMS. Holding shall assume or retain liability for all unpaid vacation pay, sick pay and personal leave accrued by Holding Employees as of the Effective Time. JEFG shall assume or retain liability for all unpaid vacation pay, sick pay and personal leave accrued by JEFG Employees as of the Effective Time. ARTICLE VI HOLDING REPRESENTATIONS Holding represents to JEFG as follows: Section 6.01. ANNEX A hereto contains a true and complete list of "all employee benefit plans" as defined in Section 3(3) of ERlSA, and each other plan, arrangement or policy relating to stock options, stock purchases, compensation, deferred compensation, severance, fringe benefits and other employee benefits which are maintained or contributed to by any member of the JEFG Group or as to which any member of the JEFG Group has any direct or indirect, actual or contingent liability, other than plans, arrangements or policies maintained by the ITGI Group (such JEFG Group plans, arrangements and policies, the "Benefit Plans"), and copies of such plans, arrangements, policies and related relevant materials have been made available to ITGI. Section 6.02. No member of the Holding Group or JEFG Group has incurred, or is reasonably likely to incur, any material liability under Title IV of ERISA (other than for PBGC insurance premiums, all of which have been paid when due). All contributions to any "employee benefit plan" (as defined in Section 3(3) of ERISA) required to be made by any member of the JEFG Group or the Holding Group in accordance with the terms of such plan and, when applicable, Section 302 of ERISA or Section 412 if the Code, have been timely made. Section 6.03. Each member of the JEFG Group and each Benefit Plan are in compliance in all material respects with the applicable provisions of ERISA and the Code. Each Benefit Plan intended to qualify under Section 401 of the Code is so qualified. With respect to all Benefit Plans, there are no audits, investigations or claims pending or, to the knowledge of Holding, threatened (other than routine claims for benefits). There have been no nonexempt prohibited transactions under the Code or ERISA with respect to any Benefit Plans. With respect to all Benefit Plans that are welfare plans (as defined in ERISA Section 3(1)), such plans have complied in all material respects with the COBRA continuation coverage requirements of Code Section 4980B. No member of the JEFG Group has any liability with respect to any plans providing benefits with respect to employees employed outside the United States. Section 6.04. The consummation of the transactions contemplated by the Distribution Agreement and this Agreement will not result in JEFG being liable to any individual for severance pay. ARTICLE VII INDEMNIFICATION Section 7.01. HOLDING INDEMNIFICATION OF THE JEFG GROUP. On or after the Effective Time, Holding shall indemnify, defend and hold harmless each member of the JEFG Group, and each of their respective directors, officers, employees and agents (the "JEFG Indemnitees") from and against any and all claims, costs, damages, losses, liabilities and expenses (including, without limitation, C-7 reasonable expenses of investigation and reasonable attorneys fees and expenses in connection with any and all Actions or threatened Actions) (collectively, "INDEMNIFIABLE LOSSES") incurred or suffered by any of the JEFG Indemnitees and arising out of, or due to or otherwise in connection with (x) any of the employee benefit liabilities and obligations assumed or retained by Holding pursuant to this Agreement or (y) the failure of Holding or any member of the Holding Group to pay, perform or otherwise discharge, any of the employee benefit liabilities and obligations assumed or retained, and representations and agreements made, by Holding pursuant to this Agreement. Section 7.02. JEFG INDEMNIFICATION OF HOLDING. On and after the Effective Time, JEFG shall indemnify, defend and hold harmless Holding, and each of its respective directors, officers, employees and agents (the "HOLDING INDEMNITEES") from and against any and all Indemnifiable Losses incurred or suffered by any of the Holding Indemnitees and arising out of, or due to or otherwise in connection with (x) any of the employee benefit liabilities and obligations assumed or retained by JEFG pursuant to the Agreement or (y) the failure of JEFG or any member of the JEFG Group to pay, perform or otherwise discharge, any of the employee benefit liabilities and obligations assumed or retained, and agreements made, by JEFG pursuant to this Agreement. Section 7.03. INSURANCE AND THIRD PARTY OBLIGATIONS. No insurer or any other third party shall be (a) entitled to a benefit it would not be entitled to receive in the absence of the foregoing indemnification provisions, (b) relieved of the responsibility to pay any claims to which it is obligated or (c) entitled to any subrogation rights with respect to any obligation hereunder. ARTICLE VIII INDEMNIFICATION PROCEDURES Section 8.01. NOTICE AND PAYMENT OF CLAIMS. If any JEFG or Holding Indemnitee (the "INDEMNIFIED PARTY") determines that it is or may be entitled to indemnification by a party (the "INDEMNIFYING PARTY") under Article VII (other than in connection with any Action or claim subject to Section 8.02), the Indemnified Party shall deliver to the Indemnifying Party a written notice specifying, to the extent reasonably practicable, the basis for its claim for indemnification and the amount for which the Indemnified Party reasonably believes it is entitled to be indemnified. After the Indemnifying Party shall been notified of the amount for which the Indemnified Party seeks indemnification, the Indemnifying Party shall, within 90 days after receipt of such notice, pay the Indemnified Party such amount in cash or other immediately available funds (or reach agreement with the Indemnified Party as to a mutually agreeable alternative payment schedule) unless the Indemnifying Party objects to the claim for indemnification or the amount thereof. If the Indemnifying Party does not give the Indemnified Party written notice objecting to such claim and setting forth the grounds therefor within the same 90 day period, the Indemnifying Party shall be deemed to have acknowledged its liability for such claim and the Indemnified Party may exercise any and all of its rights under applicable law to collect such amount. Section 8.02. NOTICE AND DEFENSE OF THIRD-PARTY CLAIMS. Promptly following the earlier of (a) receipt of notice of the commencement by a third party of any Action against or otherwise involving any Indemnified Party or (b) receipt of information from a third party alleging the existence of a claim against an Indemnified Party, in either case, with respect to which indemnification may be sought pursuant to this Agreement (a "THIRD-PARTY CLAIM"), the Indemnified Party shall give the Indemnifying Party written notice thereof. The failure of the Indemnified Party to give notice as provided in this Section 8.02 shall not relieve the Indemnifying Party of its obligations under this Agreement, except to the extent that the Indemnifying Party is prejudiced by such failure to give notice. Within 90 days after receipt of such notice, the Indemnifying Party may (a) by giving written notice thereof to the Indemnified Party, acknowledge liability for and at its option elect to assume the defense of such Third-Party Claim at its sole cost and expense or (b) object to the claim of indemnification set forth in C-8 the notice delivered by the Indemnified Party pursuant to the first sentence of this Section 8.02; provided that if the Indemnifying Party does not within the same 90 day period give the Indemnified Party written notice objecting to such claim and setting forth the grounds therefor or electing to assume the defense, the Indemnifying Party shall be deemed to have acknowledged, as between the parties hereto, its liability for such Third-Party Claim. Any contest of a Third Party Claim as to which the Indemnifying Party has elected to assume the defense shall be conducted by attorneys employed by the Indemnifying Party and reasonably satisfactory to the Indemnified Party; provided that the Indemnified Party shall have the right to participate in such proceedings and to be represented by attorneys of its own choosing at the Indemnified Party's sole cost and expense. Notwithstanding the foregoing, (i) the Indemnifying Party shall not be entitled to assume the defense of any Third-Party Claim (and shall be liable to the Indemnified Party for the reasonable fees and expenses incurred by the Indemnified Party in defending such Third-Party Claim) if there are one or more legal defenses available only to the Indemnified Party that conflict, in one or more significant substantive respects, with those available to the Indemnifying Party with respect to such Third-Party Claim and (ii) if at any time after assuming the defense of a Third-Party Claim an Indemnifying Party shall fail to prosecute or shall withdraw from the defense of such Third-Party Claim, the Indemnified Party shall be entitled to resume the defense thereof with counsel selected by such Indemnified Party and the Indemnifying Party shall be liable for the reasonable fees and expenses of counsel incurred by the Indemnified Party in such defense. The Indemnifying Party may settle, compromise or discharge a Third-Party Claim, provided, the Indemnifying Party shall have obtained the prior written consent of the Indemnified Party, which consent shall not be unreasonably withheld. If, after receipt of notice of a Third-Party Claim, the Indemnifying Party does not undertake to defend such Third-Party Claim within 90 days of such notice, the Indemnified Party may, but shall have no obligation to, contest any lawsuit or action with respect to such Third-Party Claim and the Indemnifying Party shall be bound by the results obtained with respect thereto by the Indemnified Party. Indemnification shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or Indemnifiable Loss is incurred. The parties agree to render to each other such assistance as may reasonably be requested in order to ensure the proper and adequate defense of any Third-Party Claim. The remedies provided in this Article VIII shall be cumulative and shall not preclude assertion by any Indemnified Party of any other rights or the seeking of any and all other remedies against any Indemnifying Party. Section 8.03. CONTRIBUTION. To the extent that any indemnification provided for in Section 7.01 or 7.02 is unavailable to an Indemnified Party or is insufficient in respect of any of the Indemnifiable Losses of such Indemnified Party, then the Indemnifying Party, in lieu of, or in addition to, indemnifying such Indemnified Party hereunder, shall contribute to the amount paid or payable by such Indemnified Party as a result of such Indemnifiable Losses (i) in such proportion as is appropriate to reflect the relative benefits received by such Indemnifying Party on the one hand and the Indemnified Party on the other hand from the transaction or other matter which resulted in the Indemnifiable Losses or (ii) if the allocation provided by clause (i) above is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Indemnifying Party on the one hand and of the Indemnified Party on the other hand in connection with the action, inaction, statements or omissions that resulted from such Indemnifiable Losses as well as any other relevant equitable considerations. ARTICLE IX MISCELLANEOUS Section 9.01. NOTICES. All notices and communications under this Agreement shall be in writing and any communication or delivery hereunder shall be deemed to have been duly given when received C-9 addressed as follows:If to JEFG, to: Investment Technology Group, Inc. 380 Madison Avenue, 4th Floor New York, New York 10017 Attention: Chief Financial Officer With a copy to: Cahill Gordon & Reindel 80 Pine Street New York, New York 10005 Attention: Immanuel Kohn, Esq. If to Holding, to: Jefferies Group, Inc. JEF Holding Company, Inc. 11100 Santa Monica Boulevard, 11th Floor Los Angeles, California 90025 Attention: Chief Financial Officer With a copy to: Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, PA 19103 Attention: Brian J. Lynch, Esq. Such notices shall be deemed received (i) as of the date of delivery by hand delivery, (ii) one business day after such notice is given to a national overnight delivery service or (iii) five business days after placed in the United States mail, provided such mail is sent by certified mail with return receipt requested. Either party may, by written notice so delivered to the other party, change the address to which delivery of any notice shall thereafter be made. Section 9.02. AMENDMENT AND WAIVER. This Agreement may not be altered or amended, nor may rights hereunder be waived, except by an instrument in writing executed by the party or parties to be charged with such amendment or waiver and by ITGI. No waiver of any terms, provision or condition of or failure to exercise or delay in exercising any rights or remedies under this Agreement, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, provision, condition, right or remedy or as a waiver of any other term, provision or condition of this Agreement. Section 9.03. ENTIRE AGREEMENT. This Agreement, together with the Distribution Agreement, constitutes the entire understanding of the parties hereto with respect to the subject matter hereof, superseding all negotiations, prior discussions and prior agreements and understandings relating to such subject matter. To the extent that the provisions of this Agreement are inconsistent with the provisions of the Distribution Agreement, the provisions of this Agreement shall prevail. Section 9.04. PARTIES IN INTEREST. Neither of the parties hereto may assign its rights or delegate any of its duties under this Agreement without the prior written consent of each other party and of ITGI. This Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and C-10 their respective successors and permitted assigns. Nothing contained in this Agreement, express or implied, is intended to confer any benefits, rights or remedies upon any person or entity other than members of the JEFG Group and Holding, and the JEFG Indemnitees and Holding Indemnitees and their respective successors and assigns under Articles VII and VIII hereof. Section 9.05. FURTHER ASSURANCES AND CONSENTS. In addition to the actions specifically provided for elsewhere in this Agreement, each of the parties hereto will use its reasonable efforts to (i) execute and deliver such further instruments and documents and take such other actions as any other party may reasonably request in order to effectuate the purposes of this Agreement and to carry out the terms hereof and (ii) take, or cause to be taken, all actions, and to do, or cause to be done, all things, reasonably necessary, proper or advisable under applicable laws, regulations and agreements or otherwise to consummate and make effective the transactions contemplated by this Agreement, including, without limitation, using its reasonable efforts to obtain any consents and approvals and to make any filings and applications necessary or desirable in order to consummate the transactions contemplated by this Agreement. Section 9.06. SEVERABILITY. The provisions of this Agreement are severable and should any provision hereof be void, voidable or unenforceable under any applicable law, such provision shall not affect or invalidate any other provision of this Agreement, which shall continue to govern the relative rights and duties of the parties as though such void, voidable or unenforceable provision were not part hereof. Section 9.07. EXPRESS THIRD-PARTY BENEFICIARY. Prior to the Merger, ITGI is an express third party beneficiary of this Agreement and shall be entitled to enforce the provisions hereof as if a party hereto. Section 9.08. GOVERNING LAW. This Agreement shall be construed in accordance with, and governed by, the laws of the State of New York, without regard to the conflicts of law rules of such state. Section 9.09. COUNTERPARTS. This Agreement may be executed in one or more counterparts each of which shall be deemed an original instrument, but all of which together shall constitute but one and the same Agreement. Section 9.10. DISPUTES. Resolution of any and all disputes arising from or in connection with this Agreement, whether based on contract, tort, statute or otherwise, including, but not limited to, disputes in connection with claims by third parties shall be exclusively governed by and settled in accordance with provisions identical to those set forth in Section 11.10 of the Distribution Agreement, which Section is hereby incorporated by this reference. Section 9.11. Holding will provide to ITGI, as soon as practicable following its request, any information reasonably needed by ITGI relating to any of the employee benefit plans referred to in this Agreement. In addition, as soon as practicable following the Effective Time Holding will provide to ITGI copies of all domestic relations orders received with respect to JEFG Employees in connection with the JEFG ESOP, the JEFG PSP and the JEFG Pension Plan. C-11 IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement as of the day and year first above written. JEFFERIES GROUP, INC. BY /s/ CLARENCE T. SCHMITZ ----------------------------------------- Clarence T. Schmitz, Executive Vice President and CFO JEF HOLDING COMPANY, INC. BY /s/ JERRY M. GLUCK ----------------------------------------- Jerry M. Gluck, Secretary and General Counsel
C-12 EX-10.2-5 9 EXHIBIT 10.2.5 AMENDED AND RESTATED TAX SHARING AGREEMENT THIS AGREEMENT is entered into as of the 17th day of March, 1999, by and among JEFFERIES GROUP, INC., a Delaware corporation ("JEFG") , JEF HOLDING COMPANY, INC., a Delaware corporation ("HOLDING"), and INVESTMENT TECHNOLOGY GROUP, INC., a Delaware corporation ("ITGI"). WITNESSETH: WHEREAS, as of January 1, 1994, JEFG and ITGI entered into a tax sharing agreement to define the method by which Federal, state and local income and franchise taxes would be allocated between JEFG as the common parent and ITGI as a subsidiary of JEFG (the "1994 Tax Sharing Agreement"); and WHEREAS, the JEFG Board of Directors has determined that it is appropriate and desirable to distribute all of the shares of HOLDING common stock that it owns to the holders of JEFG common stock (the "Distribution") in a transaction intended to qualify as a tax-free distribution for federal income tax purposes under Section 355 of the Internal Revenue Code of 1986, as amended (the "Code"); and WHEREAS, JEFG has applied to the Internal Revenue Service for a private letter ruling (the "Ruling") to the effect that the Distribution will qualify as a tax-free distribution for federal income tax purposes under Section 355 of the Code; and WHEREAS, ITGI will be the principal subsidiary of JEFG immediately after the Distribution; and WHEREAS, it is intended that ITGI will merge with and into JEFG following the Distribution (the "Merger"); and WHEREAS, it is intended that HOLDING and its subsidiaries will accordingly cease to be members of the affiliated group (within the meaning of Section 1504(a) of the Code) of which JEFG is the common parent, effective on or about [April 27, 1999] (the "Effective Date"); and WHEREAS, JEFG, HOLDING and ITGI have entered into a tax sharing and indemnification agreement, dated as of March 17, 1999, which is to apply only to the 1999 taxable year (the "Tax Sharing and Indemnification Agreement"); and WHEREAS, the parties desire to amend the 1994 Tax Sharing Agreement in certain respects, including but not limited to the addition of HOLDING as a party and the exclusion of the 1999 taxable year (the "1999 Taxable Year") and all subsequent taxable years from its coverage, and to restate the 1994 Tax Sharing Agreement in its entirety, NOW, THEREFORE, in consideration of the foregoing and of the mutual promises, covenants and conditions hereinafter contained, the parties hereto agree that the 1994 Tax Sharing Agreement is hereby amended and restated in its entirety as follows: 1. DEFINITIONS The following terms as used in this Agreement shall have the meanings set forth below: (a) "Additional Amount" shall mean the amount determined under Section 3 hereof. -2- (b) "Consolidated Return" shall mean a consolidated Federal income tax return filed pursuant to Section 1501 of the Code. (c) "Consolidated Taxable Income" shall mean the consolidated Federal taxable income of the JEFG Group for any taxable year for which the JEFG Group files a Consolidated Return. (d) "Consolidated Tax Liability" shall mean the consolidated Federal income tax liability of the JEFG Group for any taxable year for which the JEFG Group files a Consolidated Return. (e) "IRS" shall mean the Internal Revenue Service. (f) "JEFG Group" shall mean the affiliated group of corporations of which JEFG is the common parent. In the event that the merger takes place as contemplated and JEFG changes its name to Investment Technology Group, Inc. ("New ITGI"), the term "JEFG Group" shall include the affiliated group of corporations of which New ITGI is the common parent. (g) "Loss Amount" shall mean the amount determined under Section 2 hereof. (h) "Member" shall mean each includible member of the JEFG Group. (i) "Regulations" shall mean the Treasury Regulations as in effect from time to time. (j) "Separate Return Tax Liability" shall mean the Federal income tax liability of a Member and its subsidiaries computed as if they had filed a separate Federal income -3- tax return for the applicable taxable year with the modifications set forth in Section 1.1552-1(a)(2)(ii) of the Regulations. If the computation of a Member's Separate Return Tax Liability as provided herein does not result in a positive amount, such Member's Separate Return Tax Liability shall be deemed to be zero. (k) "Separate Taxable Income" shall mean an amount determined with respect to a Member and its subsidiaries in accordance with Section 1.1502-12 of the Regulations with the adjustments contained in Section 1.1552-1(a)(1)(ii) of the Regulations. If the computation of a Member's Separate Taxable Income as provided herein does not result in a positive amount, such Member's Separate Taxable Income shall be deemed to be zero. (l) "Separate Tax Liability" shall mean the amount determined under Section 2 hereof. 2. SEPARATE TAX LIABILITY (a) The Separate Tax Liability of ITGI for each taxable year shall be the amount set forth in paragraph (b) hereof as modified by paragraphs (c) and (d) hereof. (b) The amount referred to in this paragraph (b) shall be an amount equal to that portion of the Consolidated Tax Liability for such taxable year that the Separate Taxable Income of ITGI for such taxable year bears to the sum of the Separate Taxable Incomes of all Members for such taxable year; PROVIDED, HOWEVER, that such amount shall not exceed the Consolidated Tax Liability for such taxable year. -4- (c) The amount computed pursuant to paragraph (b) above shall be increased by 100% of the excess, if any, of the ITGI Separate Return Tax Liability for such taxable year over such amount (the "Loss Amount"). (d) Any federal, state or local income tax deduction resulting from (i) the payment to the JEFG Pension Plan described in Section 3.03(a) of the Benefits Agreement (or from benefits distributions related thereto), or (ii) the payment of benefits under the JEFG CAP Plan to JEFG employees (each as defined in the Benefits Agreement), shall be for the benefit of ITGI (and the JEFG Group after the Distribution) and not for the benefit of HOLDING. 3. ADDITIONAL AMOUNT The Additional Amount for each taxable year shall be equal to 100% of the amount, if any, by which the Consolidated Tax Liability has been decreased by reason of the inclusion of ITGI and its subsidiaries in the JEFG Group for such taxable year. 4. FILING AND PAYMENTS (a) HOLDING shall file or cause to be filed the Consolidated Return for the JEFG Group for the 1998 taxable year. (b) JEFG shall file or cause to be filed the Consolidated Return for the JEFG Group for all taxable periods covered under this Agreement other than the 1998 taxable year. (c) For any taxable year, payment of (i) the Separate Tax Liability of ITGI by ITGI (less any Loss Amount paid to HOLDING) to JEFG (or to the IRS after the -5- Merger), (ii) the excess of the Consolidated Liability over the amount described in (i) (the "Holding Liability") by HOLDING to JEFG (or to ITGI after the Merger), (iii) the Additional Amount, if any, by HOLDING to ITGI and (iv) the Loss Amount, if any, by ITGI to HOLDING with respect to such taxable year shall be made as follows: (A) For each taxable year, HOLDING has estimated the Separate Tax Liability (less any Loss Amount to be paid to HOLDING), the Holding Liability, the Additional Amount and the Loss Amount for such taxable year. (B) ITGI and HOLDING have each paid on or before each of the due dates for HOLDING to make payment of estimates of JEFG Group's Federal income taxes for each taxable year one-fourth of the amount estimated pursuant to paragraph (i) above (collectively, the "Estimated Amounts"). If, after paying any such installment of the Estimated Amounts, HOLDING made a new estimate, the amount of each remaining installment (if any) was equal to the amount which would have been payable if the new estimate had been made when the first estimate for the taxable year was made, increased or decreased, as applicable, by the amount computed by dividing: (1) the difference between (1) the amount of the Estimated Amounts required to be paid before the date on which the new estimate is made, and (2) the amount of the Estimated Amounts which would have been required to be paid before such date if the new estimate had been made when the first estimate was made, by -6- (2) the number of installments remaining to be paid on or after the date on which the new estimate is made. (d) If, after the end of any taxable year, at the time of the filing of an application for extension of the time to file the tax return for such taxable year, if so filed, it is determined that the estimated Separate Tax Liability of ITGI (less any Loss Amount paid to HOLDING), Holding Liability, Additional Amount or Loss Amount for such taxable period exceeds the aggregate amount paid pursuant to subparagraph (c), with respect to such taxable period, then such excess shall be paid on or before the later of (i) the 15th day of the third month after the end of such taxable period, and (ii) the date on which such excess is finally determined, which shall be no later than 30 days after the extension for such taxable period is filed. (e) If, after the end of each taxable year with respect to which HOLDING or JEFG filed a Consolidated Return pursuant to this Agreement, it is determined that the actual Separate Tax Liability of ITGI (less any Loss Amount paid to HOLDING), Holding Liability, Additional Amount or Loss Amount for such taxable period exceeds the aggregate amount paid pursuant to subparagraph (c) and (d), with respect to such taxable period, then such excess shall be paid on or before the later of (i) the 15th day of the third month after the end of such taxable period, and (ii) the date on which such excess is finally determined, which shall be no later than 30 days after the Consolidated Return for such taxable period is filed. (f) If it is determined that the amount paid pursuant to subparagraphs (c), (d), or (e) above with respect to any taxable period exceeds the actual Separate Tax Liability of ITGI (less any Loss Amount paid to HOLDING), Holding Liability, Additional Amount or -7- Loss Amount for such taxable period, then such excess shall be repaid on or before the later of (i) the 15th day of the third month after the end of such taxable period, and (ii) the date on which such excess is finally determined, which shall be no later than 30 days after the Consolidated Return for such taxable period is filed. 5. CARRYBACKS (a) If the JEFG Group has a consolidated unused investment credit, a consolidated unused foreign tax credit, a consolidated excess charitable contribution, a consolidated net capital loss or a consolidated net operating loss, as such terms are defined in the Regulations (a "Consolidated Excess Amount") for any taxable year, the portion of such Consolidated Excess Amount which is attributable to a Member (the "Separate Excess Amount") shall be computed in accordance with Section 1.1502-79 of the Regulations. Any consolidated unused research and experimentation credit of the JEFG Group shall be treated and calculated in a manner consistent with the foregoing sentence, and shall be included in the term "Consolidated Excess Amount." (b) If such Consolidated Excess Amount is carried back to a prior taxable year of the JEFG Group during which ITGI or one of its subsidiaries was a Member, then the amounts due under this Agreement for such prior taxable year shall be redetermined by taking into account such Consolidated Excess Amount and any Separate Excess Amounts allocable to such taxable year. -8- (c) Payment of any amount due under this Section 5 shall be made on the date that a credit or refund is allowed with respect to the taxable year to which such payment relates. 6. SUBSEQUENT ADJUSTMENTS AND PROCEDURAL MATTERS (a) If any adjustments (other than adjustments made pursuant to Section 5 hereof) are made to the income, gains, losses, deductions or credits of the JEFG Group for a taxable year during which ITGI or one of its subsidiaries was a member, whether by reason of the filing of an amended return or a claim for refund with respect to such taxable year or an audit with respect to such taxable year by the IRS, the amounts due under this Agreement for such taxable year shall be redetermined by taking into account such adjustments. If, as a result of such redetermination, any amounts due under this Agreement shall differ from the amounts previously paid, then payment of such difference shall be made (a) in the case of an adjustment resulting in a credit or refund, on the date on which such credit or refund is allowed with respect to such adjustment or (b) in the case of an adjustment resulting in the assertion of a deficiency, on the date such deficiency is paid. Any amounts due under this paragraph (a) shall include any interest attributable thereto computed in accordance with Sections 6601 or 6611 of the Code, as the case may be, and any penalties or additional amounts which may be imposed. (b) If any tax audit is undertaken by any tax authority, HOLDING shall initially have primary control of any dealings with such tax authority. Upon a determination that such audit could give rise to an increase in either HOLDING's or ITGI's liability under this Agreement, then HOLDING or ITGI, as the case may be shall be given -9- primary control of any dealings with such tax authority; provided, however, that the other party will be consulted with respect to any matters which could result in an increase in the other party's liability under this Agreement. (c) If any adjustment or deficiency is proposed, asserted or assessed by any tax authority which would give rise to an increase in either HOLDING's or ITGI's liability under this Agreement, then HOLDING or ITGI, as the case may be, shall have the primary right to contest, compromise or settle any such adjustment or deficiency; provided, however, that the other party will be consulted with respect to any matters which could result in an increase in such other party's liability under this Agreement. If such adjustment or deficiency would give rise to an increase in both HOLDING's and ITGI's liability under this Agreement, then HOLDING and ITGI shall jointly have the right to contest, compromise or settle any such adjustment or deficiency. 7. CARRYBACKS FROM SEPARATE RETURN YEARS This Agreement shall have no application to the carryback of a net operating loss or credit from a separate return year (within the meaning of Section 1.1502-1(e) of the Treasury Regulations) to any taxable year of JEFG Group, and no recomputation or other payment shall be made in respect of such carryback. 8. FILING OF CALIFORNIA SINGLE RETURNS HOLDING may file or cause to be filed a single return for California franchise and income tax purposes ("California Single Return") for those affiliated corporations that are includible in a California combined report (the "JEFG Combined Group") for each of the -10- taxable years for which the JEFG Combined Group is required or permitted to file such a return. To the extent that it qualifies under California law, JEFG shall be the "key corporation" with respect to any such California Single Return and, to the extent that it does not so qualify, shall designate a "key corporation" from among the members of the JEFG Combined Group that does so qualify. Each party to this Agreement hereby consents to any such designation on behalf of itself and any direct or indirect subsidiary thereof. With regard to any income year with respect to which the JEFG Combined Group files, or it is reasonably anticipated that the JEFG Combined Group will file, a California Single Return which includes ITGI, the estimated and final California tax liability of each member of the JEFG Combined Group shall be determined, to the extent permitted by California law, in a manner consistent with the principles set forth in this Agreement, and payments of the estimated and final tax liability so determined shall be made to the key corporation at the time that payments of corresponding Federal payments are due. 9. FILING OF STATE CONSOLIDATED RETURNS To the extent permitted or required by the applicable laws of any state other than California, JEFG and its affiliated corporations (the "state consolidated group"), at the election of HOLDING in its sole discretion, may join for any taxable year in the filing of a single, combined or consolidated franchise or income tax return ("state consolidated return") with any such corporation required to file a franchise or income tax return in such state for such taxable year. With regard to any taxable year with respect to which the state consolidated group files, or it is reasonably anticipated will file, a state consolidated return which includes ITGI, the -11- estimated and final state tax liability of each member of the state consolidated group shall be determined, to the extent permitted by law of the state in which the return is to be filed, in a manner consistent with the principles set forth in this Agreement, and payments of the estimated and final tax liability so determined shall be made to the member of the state consolidated group responsible for payment of the state consolidated group's tax liability at the time that payments of corresponding Federal payments are due. 10. FURTHER ACTIONS Each of the parties hereto agrees, and agrees to cause any direct or indirect subsidiary of such party, to file such consents, elections and other documents and take such other action as may be necessary or appropriate to carry out the purpose of this Agreement. 11. RECORD RETENTION AND COSTS (a) HOLDING will retain all records relating to the determination of taxes hereunder as agent and custodian for JEFG, and HOLDING will make such records available to JEFG. (b) HOLDING and ITGI agree to split equally the third-party costs arising from the preparation and filing of all tax returns filed pursuant to this Agreement (including any applicable computations relating to carrybacks). 12. DETERMINATIONS All determinations required hereunder shall be made by KPMG LLP. Such determinations shall be binding and conclusive upon the parties for purposes hereof. 13. INTEREST -12- If any payment required to be made pursuant to Section 4, 5, 8 or 9 of this Agreement is not made within the time periods specified in those Sections, the delinquent payment shall bear interest from its due date until the date of actual payment at the rate (or rates) charged by the Internal Revenue Service on underpayments of tax for the periods in question. 14. MISCELLANEOUS PROVISIONS (a) All references and provisions under this Agreement that refer to ITGI shall be deemed to refer also to JEFG with respect to any period after the Merger. (b) This Agreement applies only to all taxable periods prior to the 1999 taxable year (which is covered by the Tax Sharing and Indemnification Agreement) in which ITGI is included in the JEFG Group. (c) This Agreement contains the entire understanding of the parties hereto with respect to the subject matter contained herein. No alteration, amendment or modification of any of the terms of this Agreement shall be valid unless made by an instrument signed in writing by an authorized officer of each party hereto. (d) This Agreement has been made in and shall be construed and enforced in accordance with the laws of the State of New York from time to time obtaining. (e) This Agreement shall be binding upon and inure to the benefit of each party hereto and their respective successors and assigns. (f) This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. -13- (g) All notices and other communications hereunder shall be deemed to have been duly given if given in writing and delivered by either in person or by facsimile with receipt acknowledged or confirmed or by certified or registered mail, return receipt requested, postage prepaid and addressed as follows: (i) If to JEFG or any of its successors prior to the Distribution at: Jefferies Group, Inc. 11100 Santa Monica Boulevard, 11th Floor Los Angeles, California 90025 Attention: Chief Executive Officer Facsimile: 310-914-1013 With a copy to: Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, PA 19103 Attention: Brian J. Lynch, Esq. (ii) If to JEFG or any of its successors after the Distribution at: Investment Technology Group, Inc. 380 Madison Avenue, 4th Floor New York, New York 10017 Attention: Chief Financial Officer Facsimile: 212-444-6490 With a copy to: Cahill Gordon & Reindel 80 Pine Street New York, New York 10005 Attention: Immanuel Kohn, Esq. (iii) If to ITGI or any of its successors at: -14- Investment Technology Group, Inc. 380 Madison Avenue, 4th Floor New York, New York 10017 Attention: Chief Financial Officer Facsimile: 212-444-6490 With a copy to: Cahill Gordon & Reindel 80 Pine Street New York, New York 10005 Attention: Immanuel Kohn, Esq. (iv) If to HOLDING at: Jefferies Group, Inc. JEF Holding Company, Inc. 11100 Santa Monica Boulevard, 11th Floor Los Angeles, California 90025 Attention: Chief Financial Officer With a copy to: Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, PA 19103 Attention: Brian J. Lynch, Esq. (h) The headings of the paragraphs of this Agreement are inserted for convenience only and shall not constitute a part hereof. -15- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and their respective corporate seals to be affixed hereto, all on the date and year first above written. "JEFG" JEFFERIES GROUP, INC., a Delaware corporation By: /s/ CLARENCE T. SCHMITZ ----------------------------------- Clarence T. Schmitz, Executive Vice President and CFO "ITGI" INVESTMENT TECHNOLOGY GROUP, INC. a Delaware corporation By: /s/ RAYMOND KILLIAN ----------------------------------- Raymond Killian, President/CEO "HOLDING" JEF HOLDING COMPANY, INC. A Delaware corporation By: /s/ JERRY M. GLUCK ----------------------------------- Jerry M. Gluck, General Counsel -16- EX-10.2-6 10 EXHIBIT 10.2.6 APPENDIX D TAX SHARING AND INDEMNIFICATION AGREEMENT THIS AGREEMENT is entered into as of the 17th day of March, 1999, by and among JEFFERIES GROUP, INC., a Delaware corporation ("JEFG"), JEF HOLDING COMPANY, INC., a Delaware corporation ("HOLDING"), and INVESTMENT TECHNOLOGY GROUP, INC., a Delaware corporation ("ITGI"). WITNESSETH: WHEREAS, the JEFG Board of Directors has determined that it is appropriate and desirable to distribute all of the shares of HOLDING common stock that it owns to the holders of JEFG common stock (the "Distribution") in a transaction intended to qualify as a tax-free distribution for federal income tax purposes under Section 355 of the Internal Revenue Code of 1986, as amended (the "Code"); and WHEREAS, JEFG has applied to the Internal Revenue Service for a private letter ruling (the "Ruling") to the effect that the Distribution will qualify as a tax-free distribution for federal income tax purposes under Section 355 of the Code; and WHEREAS, ITGI will be the principal subsidiary of JEFG immediately after the Distribution; and WHEREAS, it is intended that ITGI will merge with and into JEFG following the Distribution (the "Merger"); and WHEREAS, it is intended that HOLDING and its subsidiaries will accordingly cease to be members of the affiliated group (within the meaning of Section 1504(a) of the Code) of which JEFG is the common parent, effective on or about April 27, 1999 (the "Effective Date"); and WHEREAS, the parties desire to provide for and agree upon the allocation of liabilities for taxes with respect to the parties for the taxable year that includes the Effective Date (the "1999 Taxable Year"); and WHEREAS, the parties hereto also desire to provide for the preparation and filing of tax returns along with the payment of taxes shown due and payable thereon with respect to the 1999 Taxable Year, the treatment of carrybacks and adjustments with respect to the parties for the 1999 Taxable Year, and any other matters related to taxes with respect to the 1999 Taxable Year, including indemnification for any taxes imposed as a result of certain actions by the parties that are inconsistent with the treatment of the Distribution as tax-free; and WHEREAS, the Tax Sharing Agreement entered into as of January 1, 1994 by and between JEFG and ITGI has been terminated in its existing form and the Amended and Restated Tax Sharing Agreement dated as of March 17, 1999 by and among JEFG, HOLDING and ITGI (the "Prior Agreement") (attached hereto as Exhibit A) will apply to all tax years ending before the 1999 Taxable Year, NOW, THEREFORE, in consideration of the foregoing and of the mutual promises, covenants and conditions hereinafter contained, the parties hereto agree as follows: 1. DEFINITIONS The following terms as used in this Agreement shall have the meanings set forth below: (a) "Additional Amount" shall mean the amount determined under Section 3 hereof. D-1 (b) "Consolidated Return" shall mean a consolidated Federal income tax return filed pursuant to Section 1501 of the Code. (c) "Consolidated Taxable Income" shall mean the consolidated Federal taxable income of the JEFG Group for any taxable year for which the JEFG Group files a Consolidated Return. (d) "Consolidated Tax Liability" shall mean the consolidated Federal income tax liability of the JEFG Group for any taxable year for which the JEFG Group files a Consolidated Return. (e) "IRS" shall mean the Internal Revenue Service. (f) "JEFG Group" shall mean the affiliated group of corporations of which JEFG is the common parent. In the event that the merger takes place as contemplated and JEFG changes its name to Investment Technology Group, Inc. ("New ITGI"), the term "JEFG Group" shall include the affiliated group of corporations of which New ITGI is the common parent. (g) "Loss Amount" shall mean the amount determined under Section 2 hereof. (h) "Member" shall mean each includible member of the JEFG Group. (i) "Regulations" shall mean the Treasury Regulations as in effect from time to time. (j) "Separate Return Tax Liability" shall mean the Federal income tax liability of a Member and its subsidiaries computed as if they had filed a separate Federal income tax return for the applicable taxable year with the modifications set forth in Section 1.1552-1(a)(2)(ii) of the Regulations. If the computation of a Member's Separate Return Tax Liability as provided herein does not result in a positive amount, such Member's Separate Return Tax Liability shall be deemed to be zero. For purposes of this definition, ITGI's Separate Return Tax Liability shall include JEFG's Separate Return Tax Liability for the period after the Distribution. (k) "Separate Taxable Income" shall mean an amount determined with respect to a Member and its subsidiaries in accordance with Section 1.1502-12 of the Regulations with the adjustments contained in Section 1.1552-1(a)(1)(ii) of the Regulations. If the computation of a Member's Separate Taxable Income as provided herein does not result in a positive amount, such Member's Separate Taxable Income shall be deemed to be zero. For purposes of this definition, ITGI's Separate Taxable Income shall include JEFG's Separate Taxable Income for the period after the Distribution. (l) "Separate Tax Liability" shall mean the amount determined under Section 2 hereof. 2. SEPARATE TAX LIABILITY (a) The Separate Tax Liability of ITGI shall be the amount set forth in paragraph (b) hereof as modified by paragraphs (c) and (d) hereof. (b) The amount referred to in this paragraph (b) shall be an amount equal to that portion of the Consolidated Tax Liability for such taxable year that the Separate Taxable Income of ITGI for such taxable year bears to the sum of the Separate Taxable Incomes of all Members for such taxable year; PROVIDED, HOWEVER, that such amount shall not exceed the Consolidated Tax Liability for such taxable year. (c) The amount computed pursuant to paragraph (b) above shall be increased by 100% of the excess, if any, of the ITGI Separate Return Tax Liability for such taxable year over such amount (the "Loss Amount"). (d) Any federal, state or local income tax deduction resulting from (i) the payment to the JEFG Pension Plan described in Section 3.03(a) of the Benefits Agreement (or from benefits distributions related thereto), or (ii) the payment of benefits under the JEFG CAP Plan to JEFG D-2 employees (each as defined in the Benefits Agreement), shall be for the benefit of ITGI (and the JEFG Group after the Distribution) and not for the benefit of HOLDING. 3. ADDITIONAL AMOUNT The Additional Amount shall be equal to 100% of the amount, if any, by which the Consolidated Tax Liability for the 1999 Taxable Year has been decreased by reason of the inclusion of ITGI and its subsidiaries in the JEFG Group for the 1999 Taxable Year. 4. PAYMENTS For the 1999 Taxable Year, payment of (i) the Separate Tax Liability of ITGI by ITGI (less any Loss Amount paid to HOLDING) to JEFG (or to the IRS after the Merger), (ii) the excess of the Consolidated Tax Liability over the amount described in (i) (the "Holding Liability") by HOLDING to JEFG, (iii) the Additional Amount, if any, by HOLDING to ITGI and (iv) the Loss Amount, if any, by ITGI to HOLDING with respect to such taxable year shall be made as follows: (a) On or before the 15th day of the fourth month of such taxable year, JEFG shall cause KPMG LLP to estimate the Separate Tax Liability (less any Loss Amount to be paid to HOLDING), the Holding Liability, the Additional Amount and the Loss Amount for such taxable year. (b) ITGI shall pay to JEFG (or to the IRS after the Merger), HOLDING shall pay to JEFG, HOLDING shall pay to ITGI and ITGI shall pay to HOLDING on or before each of the due dates for JEFG to make payment of estimates of JEFG Group's Federal income taxes for such taxable year one-fourth of the amount estimated pursuant to paragraph (a) above (collectively, the "Estimated Amounts"). If, after paying any such installment of the Estimated Amounts, KPMG LLP makes a new estimate, the amount of each remaining installment (if any) shall be the amount which would have been payable if the new estimate had been made when the first estimate for the taxable year was made, increased or decreased, as applicable, by the amount computed by dividing: (i) the difference between (A) the amount of the Estimated Amounts required to be paid before the date on which the new estimate is made, and (B) the amount of the Estimated Amounts which would have been required to be paid before such date if the new estimate had been made when the first estimate was made, by (ii) the number of installments remaining to be paid on or after the date on which the new estimate is made. (c) If, after the end of the 1999 Taxable Year, at the time of the filing of an application for extension of the time to file the tax return for the 1999 Taxable Year, if so filed, it is determined that the estimated Separate Tax Liability of ITGI (less any Loss Amount paid to HOLDING), Holding Liability, Additional Amount or the Loss Amount for such taxable period exceeds the aggregate amount paid pursuant to subparagraph (b) above with respect to such taxable period, then such excess shall be paid on or before the later of (i) the 15th day of the third month after the end of such taxable period, and (ii) the date on which such excess is finally determined, which shall be no later than 30 days after the extension for such taxable period is filed. (d) If, after the end of the 1999 Taxable Year, it is determined that the actual Separate Tax Liability of ITGI (less any Loss Amount paid to HOLDING), Holding Liability, Additional Amount or Loss Amount for such taxable period exceeds the aggregate amount paid pursuant to subparagraph (b) and (c) above with respect to such taxable period, then such excess shall be paid on or before the later of (i) the 15th day of the third month after the end of such taxable period, and (ii) the date on which such excess is finally determined, which shall be no later than 30 days after the Consolidated Return for such taxable period is filed. D-3 (e) If, after the end of the 1999 Taxable Year, it is determined that the amount paid pursuant to subparagraphs (b), (c) or (d) above with respect to such taxable period exceeds the actual Separate Tax Liability of ITGI (less any Loss Amount paid to HOLDING), Holding Liability, Additional Amount or Loss Amount for such taxable period, then such excess shall be paid on or before the later of (i) the 15th day of the third month after the end of such taxable period, and (ii) the date on which such excess is finally determined, which shall be no later than 30 days after the Consolidated Return for such taxable period is filed. 5. CARRYBACKS (a) If the JEFG Group has a consolidated unused investment credit, a consolidated unused foreign tax credit, a consolidated excess charitable contribution, a consolidated net capital loss or a consolidated net operating loss, as such terms defined in the Regulations (a "Consolidated Excess Amount") for any taxable year, the portion of such Consolidated Excess Amount which is attributable to a Member (the "Separate Excess Amount") shall be computed in accordance with Section 1.1502-79 of the Regulations. Any consolidated unused research and experimentation credit of the JEFG Group shall be treated and calculated in a manner consistent with the foregoing sentence, and shall be included in the term "Consolidated Excess Amount." (b) If such Consolidated Excess Amount originates in the 1999 Taxable Year, it will be carried back to a prior taxable year of the JEFG Group and the effect of such carryback will be determined in accordance with the Prior Agreement. (c) Payment of any amount due under this Section 5 shall be made on the date that a credit or refund is allowed with respect to the taxable year to which such payment relates. 6. SUBSEQUENT ADJUSTMENTS AND PROCEDURAL MATTERS (a) If any adjustments (other than adjustments made pursuant to Section 5 hereof) are made to the income, gains, losses, deductions or credits of the JEFG Group for the 1999 Taxable Year, whether by reason of the filing of an amended return or a claim for refund with respect to such taxable year or an audit with respect to such taxable year by the IRS, the amounts due under this Agreement for such taxable year shall be redetermined by taking into account such adjustments. If, as a result of such redetermination, any amounts due under this Agreement shall differ from the amounts previously paid, then payment of such difference shall be made (a) in the case of an adjustment resulting in a credit or refund, on the date on which such credit or refund is allowed with respect to such adjustment or (b) in the case of an adjustment resulting in the assertion of a deficiency, on the date on which such deficiency is paid. Any amounts due under this paragraph (a) shall include any interest attributable thereto computed in accordance with Sections 6601 or 6611 of the Code, as the case may be, and any penalties or additional amounts which may be imposed. (b) If any tax audit is undertaken by any tax authority, HOLDING shall initially have primary control of any dealings with such tax authority. Upon a determination that such audit could give rise to an increase in either HOLDING's or ITGI's liability under this Agreement, then HOLDING or ITGI, as the case may be, shall be given primary control of any dealings with such tax authority; provided, however, that the other party will be consulted with respect to any matters which could result in an increase in the other party's liability under this Agreement. (c) If any adjustment or deficiency is proposed, asserted or assessed by any tax authority which would give rise to an increase in either HOLDING's or ITGI's liability under this Agreement, then HOLDING or ITGI, as the case may be, shall have the primary right to contest, compromise or settle any such adjustment or deficiency; provided, however, that the other party will be consulted with respect to any matters which could result in an increase in such other party's D-4 liability under this Agreement. If such adjustment or deficiency would give rise to an increase in both HOLDING's and ITGI's liability under this Agreement, then HOLDING and ITGI shall jointly have the right to contest, compromise or settle any such adjustment or deficiency. 7. CARRYBACKS FROM SEPARATE RETURN YEARS This Agreement shall have no application to the carryback of a net operating loss or credit from a separate return year (within the meaning of Section 1.1502-1(e) of the Treasury Regulations) to any taxable year of JEFG Group, and no recomputation or other payment shall be made in respect of such carryback. 8. FILING OF CALIFORNIA SINGLE RETURNS HOLDING may file or cause to be filed a single return for California franchise and income tax purposes ("California Single Return") for those affiliated corporations that are includible in a California combined report (the "JEFG Combined Group") for the 1999 Taxable Year if the JEFG Combined Group is required or permitted to file such a return. To the extent that it qualifies under California law, JEFG shall be the "key corporation" with respect to any such California Single Return and, to the extent that it does not so qualify, shall designate a "key corporation" from among the members of the JEFG Combined Group that does so qualify. Each party to this Agreement hereby consents to any such designation on behalf of itself and any direct or indirect subsidiary thereof. With regard to any income year with respect to which the JEFG Combined Group files, or it is reasonably anticipated that the JEFG Combined Group will file, a California Single Return for the 1999 Taxable Year, the estimated and final California tax liability of each member of the JEFG Combined Group shall be determined, to the extent permitted by California law, in a manner consistent with the principles set forth in this Agreement, and payments of the estimated and final tax liability so determined shall be made to the key corporation at the time that payments of corresponding Federal payments are due. 9. FILING OF STATE CONSOLIDATED RETURNS To the extent permitted or required by the applicable laws of any state other than California, JEFG and its affiliated corporations (the "state consolidated group"), at the election of HOLDING in its sole discretion, may join for the 1999 Taxable Year in the filing of a single, combined or consolidated franchise or income tax return ("state consolidated return") with any such corporation required to file a franchise or income tax return in such state for such taxable year. With regard to the 1999 Taxable Year with respect to which the state consolidated group files, or it is reasonably anticipated will file, a state consolidated return which includes ITGI, the estimated and final state tax liability of each member of the state consolidated group shall be determined, to the extent permitted by law of the state in which the return is to be filed, in a manner consistent with the principles set forth in this Agreement, and payments of the estimated and final tax liability so determined shall be made to the member of the state consolidated group responsible for payment of the state consolidated group's tax liability at the time that payments of corresponding Federal payments are due. 10. LIABILITY FOR TAKING CERTAIN ACTIONS INCONSISTENT WITH THE TREATMENT OF THE DISTRIBUTION AS TAX-FREE. (a) Notwithstanding any other provision of this Agreement (other than in this Section 10), (i) in the event that any party, or employee, officer, or director of such party, takes any action inconsistent with, or fails to take any action required by, or in accordance with, the treatment of the Distribution as tax-free, then such party shall be liable for the inconsistent action or failure to take required action of it or its employees, officers and directors and shall indemnify and hold the other parties harmless from any tax liabilities, including the costs thereof, resulting from such D-5 inconsistent action or failure to take required action, and (ii) if any party engages in any transaction involving its stock or assets or makes any factual statement or representation to the Internal Revenue Service in or in connection with the Ruling that is inaccurate or incomplete in any material respect, and as a result of that transaction or inaccuracy or incompleteness of such factual statement or representation, the Distribution is treated as a taxable event notwithstanding the receipt of the Ruling, then the party engaging in such transaction or making such factual statement or representation shall hold the other parties harmless from any tax liabilities, including the costs thereof, that result from the treatment of the Distribution as a taxable event. (b) For purposes of this Section 10, (i) any action taken (or failure to take action) prior to the Distribution by any subsidiary of JEFG (other than ITGI or a subsidiary of ITGI) or any employee, officer or director of such subsidiary of JEFG shall be deemed to be an action taken (or failure to take action) by HOLDING (and not JEFG) or by an employee, officer or director of HOLDING (and not JEFG); (ii) any action taken (or failure to take action) prior to the Distribution by JEFG or any employee, officer or director of JEFG shall be deemed to be an action taken (or failure to take action) by HOLDING (and not JEFG) or by an employee, officer or director of HOLDING (and not JEFG); (iii) any action taken (or failure to take action) prior to the Distribution by any subsidiary of ITGI or any employee, officer or director of such subsidiary of ITGI shall be deemed an action (or failure to take action) by ITGI (and not HOLDING) or by an employee, officer or director of ITGI (and not HOLDING); (iv) any action taken (or failure to take action) prior to the Distribution by any employee, officer or director of ITGI shall be deemed to be an action taken (or failure to take action) by ITGI (and not HOLDING) or by an employee, officer or director of ITGI (and not HOLDING); (v) any action taken (or failure to take action) after the Distribution by JEFG, any subsidiary of JEFG (including ITGI and any subsidiary of ITGI) (other than HOLDING or a subsidiary of HOLDING) or any employee, officer or director of JEFG or such subsidiary of JEFG (including ITGI and any subsidiary of ITGI) shall be deemed to be an action taken (or failure to take action) by ITGI or by an employee, officer or director of ITGI; and (vi) any action taken (or failure to take action) after the Distribution by HOLDING, any subsidiary of HOLDING or any employee, officer or director of HOLDING or such subsidiary of HOLDING shall be deemed to be an action taken (or failure to take action) by HOLDING or by an employee, officer or director of HOLDING. (c) For purposes of this Section 10, any factual statement or representation made by JEFG in or in connection with the Ruling with respect to (i) ITGI and any subsidiary of ITGI, or with respect to JEFG following the Distribution, including, without limitation, the intentions of JEFG following the Distribution, shall be deemed to be a factual statement or representation made by ITGI (and not HOLDING) or by an employee, officer or director of ITGI (and not HOLDING), and (ii) JEFG and any subsidiary of JEFG (other than ITGI or any subsidiary of ITGI and other than with respect to JEFG following the Distribution, including, without limitation, the intentions of JEFG following the Distribution) shall be deemed to be a factual statement or representation made by HOLDING (and not JEFG) or by an employee, officer or director of HOLDING (and not JEFG). (d) ITGI has reviewed the materials submitted to the IRS in and in connection with the Ruling. All such materials concerning ITGI and all such materials concerning JEFG following the Distribution, including, without limitation, any factual statements and representations concerning ITGI, its business operations, capital structure and organization, are complete and accurate in all material respects. (e) HOLDING has reviewed the materials submitted to the IRS in and in connection with the Ruling. All such materials concerning JEFG and subsidiaries (other than (i) materials relating to ITGI or any subsidiary of ITGI and (ii) materials concerning JEFG following the Distribution) including, without limitation, any factual statements and representations concerning JEFG or its D-6 subsidiaries, their business operations, capital structure and organization, are complete and accurate in all material respects. (f) HOLDING and ITGI agree to split equally the costs of defending the Ruling in a subsequent examination by the IRS if it is reasonably determined that no party is otherwise responsible for such costs as provided in this Section 10. (g) ITGI is considering an internal restructuring involving a transfer by ITG Inc. ("ITGX") of the assets, liabilities and employees of ITGX's research and development division to a newly formed subsidiary of ITGX (the "R&D Subsidiary"), followed by a distribution by ITGX of all of the stock of the R&D Subsidiary to ITGI (such transfer and distribution referred to hereinafter as the "Internal Spin"). ITGI hereby represents and warrants that ITGI and ITGX have not consummated the Internal Spin in its entirety and have not consummated either of (i) such transfer of assets, liabilities and employees to the R&D Subsidiary or (ii) such distribution of the stock of the R&D Subsidiary. ITGI further represents and agrees that it will not consummate, and will cause ITGX not to consummate, either the Internal Spin in its entirety or either of (i) such transfer of assets, liabilities and employees to the R&D Subsidiary or (ii) such distribution of the stock of the R&D Subsidiary unless and until it has received a ruling from the IRS that any such consummation will not adversely affect any ruling issued by the IRS pursuant to the Ruling, and the subsequent supplements to the Ruling. 11. REPRESENTATIONS OF HOLDING. HOLDING represents and warrants to ITGI that, to the best of its knowledge, subject to the exceptions provided in Schedule attached hereto, and subject to other exceptions that are not material individually or in the aggregate: (a) JEFG will have prepared and timely filed with the appropriate taxing authority all tax returns and reports required to be filed through the date of the Distribution, taking into account any extension of time to file granted to JEFG; (b) JEFG will have timely paid all taxes (including interest and penalties thereon and additions thereto) due and payable by it (including any federal income tax liability of the JEFG Group and any tax liability of a combined or consolidated state, local or foreign group which includes JEFG for any period prior to the Distribution); (c) any deficiencies or assessments asserted in writing against JEFG by any taxing authority through the date of the Distribution will have been paid or fully settled; (d) JEFG is not presently under examination or audit by any taxing authority; (e) no extension of the period for assessment or collection of any tax is currently in effect with respect to JEFG; (f) copies of all tax returns and reports filed by JEFG and any other books and records and other information relating to any liability (or potential liability) of JEFG for taxes have been made available to ITGI; and (g) no Member of the JEFG Group has entered into any intercompany transaction (as that term is defined in Section 1.1502-13 of the Treasury Regulations) that may result in any material tax or addition to tax such as interest or penalties. 12. FURTHER ACTIONS Each of the parties hereto agrees, and agrees to cause any direct or indirect subsidiary of such party, to file such consents, elections and other documents and take such other action as may be necessary or appropriate to carry out the purpose of this Agreement. D-7 13. RECORD RETENTION, RETURN PREPARATION AND COSTS (a) HOLDING will retain all records relating to the determination of taxes hereunder as agent and custodian for JEFG, and HOLDING will make such records available to JEFG. (b) KPMG LLP will prepare all tax returns to be filed pursuant to this Agreement in a manner consistent with past practice and will make all computations relating to estimated taxes and carrybacks for purposes of this Agreement. (c) HOLDING and ITGI agree to split equally the costs arising from the preparation and filing of all tax returns filed pursuant to this Agreement (including any applicable computations relating to carrybacks). 14. DETERMINATIONS Except as provided in Section 13 of this Agreement, all determinations required hereunder shall be made by the independent public accountants regularly employed by the JEFG Group at the time that such determination is required to be made. Such determinations shall be binding and conclusive upon the parties for purposes hereof. 15. INTEREST If any payment required to be made pursuant to Section 4, 5, 8 or 9 of this Agreement is not made within the time periods specified in those Sections, the delinquent payment shall bear interest from its due date until the date of actual payment at the rate (or rates) charged by the Internal Revenue Service on underpayments of tax for the periods in question. 16. MISCELLANEOUS PROVISIONS (a) All references and provisions under this Agreement that refer to ITGI shall be deemed to refer also to JEFG with respect to any period after the Merger. (b) This Agreement applies only with respect to the 1999 Taxable Year and the Prior Agreement remains in full force and effect with respect to all tax years prior to the 1999 Taxable Year. (c) This Agreement contains the entire understanding of the parties hereto with respect to the subject matter contained herein. No alteration, amendment or modification of any of the terms of this Agreement shall be valid unless made by an instrument signed in writing by an authorized officer of each party hereto. (d) This Agreement has been made in and shall be construed and enforced in accordance with the laws of the State of New York from time to time obtaining. (e) This Agreement shall be binding upon and inure to the benefit of each party hereto and their respective successors and assigns. (f) This Agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. (g) All notices and other communications hereunder shall be deemed to have been duly given if given in writing and delivered by either in person or by facsimile with receipt D-8 acknowledged or confirmed or by certified or registered mail, return receipt requested, postage prepaid and addressed as follows: (i)If to JEFG or any of its successors prior to the Distribution at: Jefferies Group, Inc. 11100 Santa Monica Boulevard, 11th Floor Los Angeles, California 90025 Attention: Chief Executive Officer Facsimile: 310-914-1013 With a copy to: Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, PA 19103 Attention: Brian J. Lynch, Esq. (ii)If to JEFG or any of its successors after the Distribution at: Investment Technology Group, Inc. 380 Madison Avenue, 4th Floor New York, New York 10017 Attention: Chief Financial Officer Facsimile: 212-444-6490 With a copy to: Cahill Gordon & Reindel 80 Pine Street New York, New York 10005 Attention: Immanuel Kohn, Esq. (iii)If to ITGI or any of its successors at: Investment Technology Group, Inc. 380 Madison Avenue, 4th Floore New York, New York 10017 Attention: Chief Financial Officer Facsimile: 212-444-6490 With a copy to: Cahill Gordon & Reindel 80 Pine Street New York, New York 10005 Attention: Immanuel Kohn, Esq. D-9 (iv)If to HOLDING at: Jefferies Group, Inc. JEF Holding Company, Inc. 11100 Santa Monica Boulevard, 11th Floor Los Angeles, California 90025 Attention: Chief Financial Officer With a copy to: Morgan, Lewis & Bockius LLP 1701 Market Street Philadelphia, PA 19103 Attention: Brian J. Lynch, Esq. (h) The headings of the paragraphs of this Agreement are inserted for convenience only and shall not constitute a part hereof. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and their respective corporate seals to be affixed hereto, all on the date and year first above written. "JEFG" JEFFERIES GROUP, INC., a Delaware corporation By: /s/ CLARENCE T. SCHMITZ ----------------------------------------- Clarence T. Schmitz, Executive Vice President and CFO "ITGI" INVESTMENT TECHNOLOGY GROUP, INC. a Delaware corporation By: /s/ RAYMOND L. KILLIAN, JR. ----------------------------------------- Raymond L. Killian, Jr., Chairman, Chief Executive Officer and President "HOLDING" JEF HOLDING COMPANY, INC. A Delaware corporation By: /s/ JERRY M. GLUCK ----------------------------------------- Jerry M. Gluck, Secretary and General Counsel
D-10 EX-10.2-7 11 EXHIBIT 10.2.7 CREDIT AGREEMENT dated as of March 16, 1999 among INVESTMENT TECHNOLOGY GROUP, INC., as Borrower and THE BANK OF NEW YORK, as Lender TABLE OF CONTENTS ARTICLE 1. DEFINITIONS.......................................................1 Section 1.01 Defined Terms.............................................1 Section 1.02 Terms Generally..........................................12 Section 1.03 Accounting Terms; GAAP...................................12 ARTICLE 2. THE CREDITS......................................................13 Section 2.01 Commitment...............................................13 Section 2.02 Requests for Loans.......................................13 Section 2.03 Funding of Loans.........................................13 Section 2.04 Termination and Reduction of Commitment..................13 Section 2.05 Repayment of Loans; Evidence of Debt.....................14 Section 2.06 Prepayment of Loans......................................14 Section 2.07 Payments Generally; Pro Rata Treatment; Sharing of Setoffs..................................................15 ARTICLE 3. INTEREST, FEES, YIELD PROTECTION, ETC............................15 Section 3.01 Interest.................................................15 Section 3.02 Fees.....................................................16 Section 3.03 Capital Adequacy.........................................17 Section 3.04 Taxes....................................................17 Section 3.05 Mitigation Obligations...................................18 ARTICLE 4. REPRESENTATIONS AND WARRANTIES...................................18 Section 4.01 Organization; Powers.....................................18 Section 4.02 Authorization; Enforceability............................18 Section 4.03 Governmental Approvals; No Conflicts.....................19 Section 4.04 Financial Condition; No Material Adverse Change..........19 Section 4.05 Properties...............................................19 Section 4.06 Litigation and Environmental Matters.....................20 Section 4.07 Compliance with Laws and Agreements......................20 Section 4.08 Investment and Holding Company Status....................20 Section 4.09 Taxes....................................................20 Section 4.10 ERISA....................................................21 Section 4.11 Disclosure...............................................21 Section 4.12 Subsidiaries.............................................21 Section 4.13 Labor Matters............................................21 Section 4.14 Solvency.................................................22 Section 4.15 Security Documents.......................................22 Section 4.16 Federal Reserve Regulations..............................22
Section 4.17 Membership...............................................23 Section 4.18 Assessments by the SIPC..................................23 Section 4.19 Year 2000................................................23 ARTICLE 5. CONDITIONS.......................................................23 Section 5.01 Effective Date...........................................23 Section 5.02 Conditions to First Loans................................25 Section 5.03 Each Credit Event........................................26 ARTICLE 6. AFFIRMATIVE COVENANTS............................................27 Section 6.01 Financial Statements and Other Information...............27 Section 6.02 Notices of Material Events...............................28 Section 6.03 Existence; Conduct of Business...........................29 Section 6.04 Payment of Obligations...................................29 Section 6.05 Maintenance of Properties................................29 Section 6.06 Books and Records; Inspection Rights.....................29 Section 6.07 Compliance with Laws.....................................29 Section 6.08 Use of Proceeds..........................................30 Section 6.09 Information Regarding Collateral.........................30 Section 6.10 Insurance................................................30 Section 6.11 Additional Domestic Subsidiaries.........................31 Section 6.12 Further Assurances.......................................31 Section 6.13 Environmental Compliance.................................31 Section 6.14 Membership...............................................31 ARTICLE 7. NEGATIVE COVENANTS...............................................32 Section 7.01 Indebtedness.............................................32 Section 7.02 Liens....................................................33 Section 7.03 Fundamental Changes......................................34 Section 7.04 Investments, Loans, Advances, Guarantees and Acquisitions.............................................35 Section 7.05 Asset Sales..............................................36 Section 7.06 Sale and Lease-Back Transactions.........................36 Section 7.07 Hedging Agreements.......................................36 Section 7.08 Restricted Payments......................................36 Section 7.09 Transactions with Affiliates.............................37 Section 7.10 Restrictive Agreements...................................37 Section 7.11 Concerning the POSIT License Agreement...................38 Section 7.12 Leverage Ratio...........................................38 Section 7.13 Net Capital..............................................38 Section 7.14 Consolidated Shareholders' Equity........................38 Section 7.15 Capital Expenditures.....................................38 Section 7.16 Initial Transactions.....................................38
-ii- ARTICLE 8. EVENTS OF DEFAULT................................................38 ARTICLE 9. MISCELLANEOUS....................................................41 Section 9.01 Notices..................................................41 Section 9.02 Waivers; Amendments......................................41 Section 9.03 Expenses; Indemnity; Damage Waiver.......................42 Section 9.04 Successors and Assigns...................................43 Section 9.05 Survival.................................................44 Section 9.06 Counterparts; Integration................................45 Section 9.07 Severability.............................................45 Section 9.08 Right of Setoff..........................................45 Section 9.09 Governing Law; Jurisdiction; Consent to Service of Process..................................................45 Section 9.10 WAIVER OF JURY TRIAL.....................................46 Section 9.11 Headings.................................................46 Section 9.12 Interest Rate Limitation.................................46 SCHEDULES: Schedule 4.06 Disclosed Matters Schedule 4.10 Exceptions to Section 4.10 (ERISA) Schedule 4.12 Subsidiaries Schedule 7.01 Existing Indebtedness Schedule 7.02 Existing Liens Schedule 7.04 Existing Investments Schedule 7.04(f) Certain Entities Schedule 7.11 Existing Restrictions EXHIBITS: Exhibit A Form of Note Exhibit B Form of Opinion of Borrower's Counsel (Section 5.01) Exhibit B-1 Form of Opinion of Borrower's Counsel (Section 5.02) Exhibit C Form of Security Agreement Exhibit D Form of Assumption Agreement
-iii- CREDIT AGREEMENT, dated as of March 16, 1999, between INVESTMENT TECHNOLOGY GROUP, INC. and THE BANK OF NEW YORK. The parties hereto agree as follows: ARTICLE 1. DEFINITIONS Section 1.01 Defined Terms As used in this Agreement, the following terms have the meanings specified below: "Affiliate" means, with respect to a specified Person, another Person that directly, or indirectly through one or more intermediaries, Controls or is Controlled by or is under common Control with the Person specified. "Alternate Base Rate" means, for any day, a rate per annum equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Rate in effect on such day plus 1/2 of 1%. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Rate shall be effective from and including the effective date of such change in the Prime Rate or the Federal Funds Rate, respectively. "Assumption Agreement" means the Assumption Agreement, substantially in the form of Exhibit D. "Available Amount" means, on any date of determination, an amount equal to the lesser of (i) the Commitment and (ii) the sum of (x) 16.666667% of the fair market value of equity securities owned by ITG and (y) the fair market value of money market instruments, including cash and cash equivalents, owned by the Borrower and the Subsidiaries. "Availability Period" means the period from and including the date on which the conditions set forth in Sections 5.01 and 5.02 shall have been satisfied (or waived pursuant to Section 9.02) to but excluding the Commitment Termination Date. "Board" means the Board of Governors of the Federal Reserve System of the United States of America. "Borrower" means (i) prior to the consummation of the merger referred to in paragraph (d) of the definition of "Initial Transactions", Investment Technology Group, Inc., a Delaware corporation and (ii) thereafter Jefferies Group, Inc., a Delaware corporation to be renamed Investment Technology Group, Inc. as described in paragraph (e) of the definition of "Initial Transactions". "Borrowing Request" means a request by the Borrower for a Loan in accordance with Section 2.02. "Business Day" means any day that is not a Saturday, Sunday or other day on which commercial banks in New York City are authorized or required by law to remain closed. "Capital Expenditures" of any Person means expenditures (whether paid in cash or other consideration or accrued as a liability) for fixed or capital assets (excluding any capitalized software and any capitalized interest and any such asset acquired in connection with normal replacement and maintenance programs properly charged to current operations and excluding any replacement assets acquired with the proceeds of insurance) made by such Person. "Capital Lease Obligations" of any Person means the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP, and the amount of such obligations shall be the capitalized amount thereof determined in accordance with GAAP. "Change in Control" means (a) upon the consummation of the Initial Transactions or at any time thereafter, the acquisition of ownership, directly or indirectly, beneficially or of record, by any Person or group (within the meaning of the Securities Exchange Act of 1934 and the rules of the Securities and Exchange Commission thereunder as in effect on the date hereof) of shares representing 50% or more of the aggregate ordinary voting power or economic interests represented by the issued and outstanding equity securities of the Borrower on a fully diluted basis, (b) the failure of the Borrower to own directly, beneficially and of record, 100% of the aggregate ordinary voting power represented by the issued and outstanding equity securities of ITG on a fully diluted basis or (c) the occupation of a majority of the seats (other than vacant seats) on the board of directors of the Borrower by Persons who were neither (i) nominated by the board of directors of the Borrower in connection with the 1999 annual stockholders' meeting, nor (ii) appointed by directors so nominated. "Change in Law" means (a) the adoption of any law, rule or regulation after the date of this Agreement, (b) any change in any law, rule or regulation or in the interpretation or application thereof by any Governmental Authority after the date of this Agreement or (c) compliance by the Lender (or, for purposes of Section 3.03(a), by any lending office of the Lender or by the Lender's holding company, if any) with any request, guideline or directive (whether or not having the force of law) of any Governmental Authority made or issued after the date of this Agreement. "Code" means the Internal Revenue Code of 1986, as amended from time to time. "Collateral" means any and all "Collateral", as defined in any applicable Security Document. "Commitment" means the commitment of the Lender to make Loans hereunder, expressed as an amount representing the maximum aggregate amount of the Credit Exposure hereunder, as such commitment may be reduced from time to time pursuant to Section 2.04. The initial amount of the Lender's Commitment is $20,000,000. -2- "Commitment Termination Date" means March 14, 2000. "Consolidated Cash Interest Expense" means, for any period, Consolidated Interest Expense for such period minus the sum of (a) pay-in-kind or accreted Consolidated Interest Expense not involving any payment of cash, (b) to the extent included in Consolidated Interest Expense, the amortization of fees paid by the Borrower or any Subsidiary in connection with the incurrence of any Indebtedness and (c) the amortization of debt discounts, if any, or fees in respect of any interest rate cap agreement or other agreement or arrangement entered into by the Borrower or any Subsidiary designed to protect the Borrower or such Subsidiary against fluctuations in interest rates. "Consolidated EBIT" means, for any period, net income for such period of the Borrower and the Subsidiaries, determined on a consolidated basis in accordance with GAAP, plus, without duplication and to the extent deducted in determining such net income, the sum of (a) Consolidated Cash Interest Expense for such period and (b) the aggregate amount of cash taxes paid for such period. Notwithstanding anything to the contrary in this definition, for purposes hereof, the term "Consolidated EBIT" shall be computed, on a consistent basis, to reflect purchases, acquisitions, sales, transfers and dispositions made by the Borrower and the Subsidiaries (other than in the ordinary course of business) during the relevant period as if they occurred at the beginning of such period. "Consolidated Interest Expense" means, for any period, interest and fees accrued, accreted or paid by the Borrower and the Subsidiaries during such period in respect of the Indebtedness of the Borrower and the Subsidiaries, determined on a consolidated basis in accordance with GAAP, including (a) the amortization of debt discounts to the extent included in interest expense in accordance with GAAP, (b) the amortization of all fees (including fees with respect to interest rate cap agreements or other agreements or arrangements entered into by the Borrower or any Subsidiary designed to protect the Borrower or such Subsidiary, as applicable, against fluctuations in interest rates) payable in connection with the incurrence of Indebtedness to the extent included in interest expense in accordance with GAAP and (c) the portion of any rents payable under capital leases allocable to interest expense in accordance with GAAP. "Consolidated Shareholders' Equity" means at any date of determination, shareholders' equity of the Borrower and the Subsidiaries determined on a consolidated basis in accordance with GAAP. "Consolidated Total Debt" means, as of any date, the aggregate principal amount of all Indebtedness of the Borrower and the Subsidiaries that would be reflected as liabilities on a consolidated balance sheet of the Borrower and the Subsidiaries as of such date prepared in accordance with GAAP. "Control" means the possession, directly or indirectly, of the power to direct or cause the direction of the management or policies of a Person, whether through the ability to exercise voting power, by contract or otherwise. The terms "Controlling" and "Controlled" have meanings correlative thereto. -3- "Credit Exposure" means, at any time, the sum of the aggregate outstanding principal amount of the Loans at such time. "Default" means any event or condition which constitutes an Event of Default or that upon notice, lapse of time or both would, unless cured or waived, become an Event of Default. "Disclosed Matters" means the actions, suits and proceedings and the environmental matters disclosed in Schedule 4.06. "dollars" or "$" refers to lawful money of the United States of America. "Domestic Subsidiary" means any Subsidiary that is organized under the laws of the United States of America or any State or political subdivision thereof. "Effective Date" means the date on which the conditions specified in Section 5.01 are satisfied (or waived in accordance with Section 9.02). "Environmental Laws" means all laws, rules, regulations, codes, ordinances, orders, decrees, judgments, injunctions, notices or binding agreements issued, promulgated or entered into by any Governmental Authority, relating in any way to the environment, preservation or reclamation of natural resources, the management, release or threatened release of any Hazardous Material or to health and safety matters. "Environmental Liability" means any liability, contingent or otherwise (including any liability for damages, costs of environmental remediation, fines, penalties or indemnities), of the Borrower or any Subsidiary directly or indirectly resulting from or based upon (a) violation of any Environmental Law, (b) the generation, use, handling, transportation, storage, treatment or disposal of any Hazardous Materials, (c) exposure to any Hazardous Materials, (d) the release or threatened release of any Hazardous Materials into the environment or (e) any contract, agreement or other consensual arrangement pursuant to which liability is assumed or imposed with respect to any of the foregoing. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended from time to time. "ERISA Affiliate" means any trade or business (whether or not incorporated) that, together with the Borrower or any Subsidiary, is treated as a single employer under Section 414(b) or (c) of the Code or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. "ERISA Event" means (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than an event for which the 30-day notice period is waived); (b) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (c) the filing pursuant to Section 412(d) of the Code or Section -4- 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (d) the incurrence by the Borrower or any ERISA Affiliate of any liability under Title IV of ERISA with respect to the termination of any Plan; (e) the receipt by the Borrower or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to an intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (f) the incurrence by the Borrower or any ERISA Affiliate of any liability with respect to the withdrawal or partial withdrawal from any Plan or Multiemployer Plan; or (g) the receipt by the Borrower or any ERISA Affiliate of any notice, or the receipt by any Multiemployer Plan from the Borrower or any ERISA Affiliate of any notice, concerning the imposition of Withdrawal Liability or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA. "Event of Default" has the meaning assigned to such term in Article 8. "Excluded Taxes" means, with respect to the Lender or any other recipient of any payment to be made by or on account of any obligation of the Borrower under any Loan Document, (a) net income taxes and franchise taxes in lieu of net income taxes imposed by the United States of America, or by the jurisdiction under the laws of which such recipient is organized or in which its principal office is located or in which its applicable lending office is located and (b) any branch profits taxes imposed by the United States of America or any similar tax imposed by any other jurisdiction in which the Borrower is located. "Federal Funds Rate" means, for any day, the rate per annum (rounded, if necessary, to the next greater 1/100 of 1%) equal to the rate per annum at which the Lender is offered overnight Federal funds by a Federal funds broker selected by the Lender at or about 2:00 p.m., New York City time, on such day, provided that if such day is not a Business Day, the Federal Funds Rate for such day shall be such rate at which the Lender is offered overnight Federal funds by such Federal funds broker at or about 2:00 p.m., New York City time, on the next preceding Business Day. "Financial Officer" means the chief financial officer, principal accounting officer, treasurer or controller of the Borrower. "FOCUS Report" means a Financial and Operational Combined Uniform Single Report which is or may be required to be filed on a monthly or quarterly basis, as the case may be, with the Securities and Exchange Commission, the NASD or other Governmental Authority or self-regulatory organization or any report which is required by the Securities and Exchange Commission, the NASD or other Governmental Authority or self-regulatory organization in lieu of such report. "GAAP" means generally accepted accounting principles in the United States of America. "Governmental Authority" means the government of the United States of America, any other nation or any political subdivision thereof, whether state or local, and any agency, authority, instrumentality, regulatory body, court, central bank or other entity (including -5- the NASD or other applicable examining authority) exercising executive, legislative, judicial, taxing, regulatory or administrative powers or functions of or pertaining to government. "Guarantee" of or by any Person (the "guarantor") means any obligation, contingent or otherwise, of the guarantor guaranteeing or having the economic effect of guaranteeing any Indebtedness or other obligation of any other Person (the "primary obligor") in any manner, whether directly or indirectly, and including any obligation of the guarantor, direct or indirect, (a) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or other obligation or to purchase (or to advance or supply funds for the purchase of) any security for the payment thereof, (b) to purchase or lease property, securities or services for the purpose of assuring the owner of such Indebtedness or other obligation of the payment thereof, (c) to maintain working capital, equity capital or any other financial statement condition or liquidity of the primary obligor as to enable the primary obligor to pay such Indebtedness or other obligation or (d) as an account party in respect of any letter of credit or letter of guaranty issued to support such Indebtedness or obligation, provided that the term "Guarantee" shall not include endorsements for collection or deposit in the ordinary course of business. The term "Guaranteed" has a meaning correlative thereto. "Hazardous Materials" means all explosive or radioactive substances or wastes and all hazardous or toxic substances, wastes or other pollutants, including petroleum or petroleum distillates, asbestos or asbestos containing materials, polychlorinated biphenyls, radon gas, infectious or medical wastes and all other substances or wastes of any nature regulated pursuant to any Environmental Law. "Hedging Agreement" means any interest rate protection agreement, foreign currency exchange agreement, commodity price protection agreement or other interest or currency exchange rate or commodity price hedging arrangement. "Indebtedness" of any Person means, without duplication, (a) all obligations of such Person for borrowed money or with respect to deposits or advances of any kind, (b) all obligations of such Person evidenced by bonds, debentures, notes or similar instruments, (c) all obligations of such Person upon which interest charges are customarily paid, (d) all obligations of such Person under conditional sale or other title retention agreements relating to property acquired by such Person, (e) all obligations of such Person in respect of the deferred purchase price of property or services (excluding current accounts payable incurred in the ordinary course of business), (f) all Indebtedness of others secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien on property owned or acquired by such Person, whether or not the Indebtedness secured thereby has been assumed, (g) all Guarantees by such Person of Indebtedness of others, (h) all Capital Lease Obligations of such Person, (i) all obligations, contingent or otherwise, of such Person as an account party in respect of letters of credit and letters of guaranty and (j) all obligations, contingent or otherwise, of such Person in respect of bankers' acceptances. The Indebtedness of any Person shall include the Indebtedness of any other entity (including any partnership in which such Person is a general partner) to the extent such Person is liable therefor as a result of such -6- Person's ownership interest in or other relationship with such entity, except to the extent the terms of such Indebtedness provide that such Person is not liable therefor. "Indemnified Taxes" means Taxes other than Excluded Taxes. "Indemnitee" has the meaning assigned to such term in Section 9.03(b). "Initial Restricted Payment" means the payment of a dividend by ITG to the Borrower and the Borrower to its shareholders in an amount not to exceed $75,000,000. "Initial Transaction Date" means the date on which the Initial Transactions are consummated. "Initial Transaction Documents" means the Agreement and Plan of Merger, Distribution Agreement, Benefits Agreement, Amended and Restated Tax Sharing Agreement and Tax Sharing and Indemnification Agreement, each dated as of March 17, 1999, executed or delivered in connection with the Initial Transactions. "Initial Transactions" means the following transactions consummated on or before the Effective Date: (a) the making of the Initial Restricted Payment; (b) the contribution by Jefferies Group of all of its assets (other than its capital stock in the Borrower) and all of its liabilities (other than liabilities related to the Borrower) to JEFCO and its subsidiaries; (c) the distribution by Jefferies Group to its shareholders of all of its capital stock in JEFCO; (d) the merger of the Borrower with and into Jefferies Group, with Jefferies Group as the survivor and the assumption by Jefferies Group of the obligations of the Borrower under the Loan Documents pursuant to the Assumption Agreement; and (e) the change of Jefferies Group's name to "Investment Technology Group, Inc.". "ITG" means ITG Inc., a Delaware corporation and a wholly owned Subsidiary. "JEFCO" means JEF Holding Company, Inc., a Delaware corporation. "Jefferies & Co." means Jefferies & Company, Inc., a Delaware corporation. "Jefferies Group" means Jefferies Group, Inc., a Delaware corporation. "Lender" means The Bank of New York and its successors and assigns. -7- "Leverage Ratio" means, as of any date, the quotient of (a) Consolidated Total Debt as of such date divided by (b) Consolidated EBIT for the period of the most recent four consecutive fiscal quarters ending before such date for which financial statements are available. "Lien" means, with respect to any asset, (a) any mortgage, deed of trust, lien, pledge, hypothecation, encumbrance, charge or security interest in, on or of such asset, (b) the interest of a vendor or a lessor under any conditional sale agreement, capital lease or title retention agreement relating to such asset and (c) in the case of securities, any purchase option, call or similar right of a third party with respect to such securities. "Loan Documents" means this Agreement, the Note, the Assumption Agreement and the Security Documents. "Loan" means a Loan referred to in Section 2.01 and made pursuant to Section 2.02. "Margin Stock" has the meaning assigned to such term in Regulation U. "Material Adverse Effect" means a material adverse effect on (a) the business, assets, operations, prospects or condition, financial or otherwise, of the Borrower and the Subsidiaries, taken as a whole, (b) the ability of the Borrower to perform any of its obligations under any Loan Document or (c) the rights of or benefits available to the Lender under any Loan Document. "Material Indebtedness" means Indebtedness (other than Indebtedness under the Loan Documents) or obligations in respect of one or more Hedging Agreements, of any one or more of the Borrower and the Subsidiaries in an aggregate principal amount exceeding $1,000,000. For purposes of determining Material Indebtedness, the "principal amount" of the obligations of the Borrower or any Subsidiary in respect of any Hedging Agreement at any time shall be the maximum aggregate amount (giving effect to any netting agreements) that the Borrower or such Subsidiary, as applicable, would be required to pay if such Hedging Agreement were terminated at such time. "Maturity Date" means March 15, 2001. "Multiemployer Plan" means a multiemployer plan as defined in Section 4001(a)(3) of ERISA. "Net Capital" means "net capital" as defined in Rule 15c3-1 or any successor rule as in effect at the time of determination. "Note" means a promissory note evidencing the Loans payable to the order of the Lender substantially in the form of Exhibit A. "Obligations" has the meaning assigned to such term in the Security Agreement. -8- "Other Taxes" means any and all current or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies arising from any payment made hereunder or from the execution, delivery or enforcement of, or otherwise with respect to, the Loan Documents. "Participant" has the meaning assigned to such term in Section 9.04(c). "PBGC" means the Pension Benefit Guaranty Corporation referred to and defined in ERISA and any successor entity performing similar functions. "Perfection Certificate" means a certificate in the form of Annex 1 to the Security Agreement or any other form approved by the Lender. "Permitted Encumbrances" means: (a) Liens imposed by law for taxes that are not yet due or are being contested in compliance with Section 6.04; (b) carriers', warehousemen's, mechanics', materialmen's, repairmen's and other like Liens imposed by law, arising in the ordinary course of business and securing obligations that are not overdue by more than 30 days or are being contested in compliance with Section 6.04; (c) pledges and deposits made in the ordinary course of business in compliance with workers' compensation, unemployment insurance and other social security laws or regulations; (d) deposits to secure the performance of bids, trade contracts, leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature, in each case in the ordinary course of business; (e) judgment liens in respect of judgments that do not constitute an Event of Default under clause (k) of Article 8; and (f) easements, zoning restrictions, rights-of-way and similar encumbrances on real property imposed by law or arising in the ordinary course of business that do not secure any monetary obligations and do not materially detract from the value of the affected property or interfere with the ordinary conduct of business of the Borrower or any Subsidiary. "Permitted Investments" means: (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent that such obligations are backed by the full faith and credit of the United States of America), in each case measuring within one year from the date of acquisition thereof; -9- (b) investments in commercial paper maturing within 270 days from the date of acquisition thereof and having, at such date of acquisition, the highest credit rating obtainable from Standard & Poor's Ratings Services, a division of The McGraw-Hill Companies, or any successor thereto, or from Moody's Investors Service, Inc. or any successor thereto; (c) investments in certificates of deposit, banker's acceptances and time deposits maturing within 180 days from the date of acquisition thereof issued or guaranteed by or placed with, and money market deposit accounts issued or offered by, any domestic office of any commercial bank organized under the laws of the United States of America or any State thereof that has a combined capital and surplus and undivided profits of not less than $500,000,000; (d) fully collateralized repurchase agreements with a term of not more than 30 days for securities described in clause (a) of this definition and entered into with a financial institution satisfying the criteria described in clause (c) of this definition; and (e) investments made by the Borrower and the Subsidiaries in the ordinary course of business. "Person" means any natural person, corporation, limited liability company, trust, joint venture, association, company, partnership, Governmental Authority or other entity. "Plan" means any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 302 of ERISA, and in respect of which the Borrower, any Subsidiary or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "POSIT Joint Venture" means the joint venture between ITG (as successor in interest to Jefferies & Co.) and BARRA Inc. formed in 1987. "POSIT License Agreement" means the License Agreement, dated as of October 1, 1987, as amended, between the POSIT Joint Venture and between ITG (as successor in interest to Jefferies & Co.). "Prime Rate" means the rate of interest per annum publicly announced from time to time by the Lender as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective from and including the date such change is publicly announced as being effective. The Prime Rate is not intended to be the lowest rate of interest charged by the Lender in connection with extensions of credit to borrowers. "Regulation T" means Regulation T of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. -10- "Regulation U" means Regulation U of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Regulation X" means Regulation X of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. "Related Parties" means the Lender's Affiliates, directors, officers, employees, agents and advisors. "Restricted Payment" means, as to any Person, any dividend or other distribution by such Person (whether in cash, securities or other property) with respect to any shares of any class of equity securities of such Person, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any such shares or any option, warrant or other right to acquire any such shares except upon the exercise of any options, warrants or other rights to acquire such shares. "Rule 15c3-1" means Rule 15c3-1 of the General Rules and Regulations as promulgated by the Securities and Exchange Commission under the Securities and Exchange Act of 1934, as amended (17 CFR 240.15c3-1), as such Rule may be amended from time to time, or any rule or regulation of the Securities and Exchange Commission which replaces Rule 15c3-1. "Security Agreement" means the Security Agreement, substantially in the form of Exhibit C, between the Borrower and the Lender. "Security Documents" means the Security Agreement and each other security agreement, instrument or other document executed or delivered pursuant to Section 6.12 or 6.13 to secure any of the Obligations. "SIPC" means The Securities Investor Protection Corporation and any successor organization discharging the functions of The Securities Investor Protection Corporation. "Street Loans" means short term borrowings, whether or not collateralized, borrowed for the purpose of facilitating settlement or financing of securities or commodities transactions in the ordinary course of business. "subsidiary" means, with respect to any Person (the "parent") at any date, any corporation, limited liability company, partnership, association or other entity the accounts of which would be consolidated with those of the parent in the parent's consolidated financial statements if such financial statements were prepared in accordance with GAAP as of such date, as well as any other corporation, limited liability company, partnership, association or other entity of which securities or other ownership interests representing more than 50% of the equity or more than 50% of the ordinary voting power or, in the case of a partnership, more than 50% of the general partnership interests are, as of such date, owned, controlled or held by the parent or one or more subsidiaries of the parent. -11- "Subsidiary" means any subsidiary of the Borrower. "Taxes" means any and all current or future taxes, levies, imposts, duties, deductions, charges or withholdings imposed by any Governmental Authority. "Transactions" means (a) the execution, delivery and performance by the Borrower of each Loan Document, (b) the borrowing of the Loans, (c) the use of the proceeds of the Loans and (d) the Initial Transactions. "Withdrawal Liability" means liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title IV of ERISA. Section 1.02 Terms Generally The definitions of terms herein shall apply equally to the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". The word "will" shall be construed to have the same meaning and effect as the word "shall". Unless the context requires otherwise, (a) any definition of or reference to any agreement, instrument or other document herein shall be construed as referring to such agreement, instrument or other document as from time to time amended, supplemented or otherwise modified (subject to any restrictions on such amendments, supplements or modifications set forth herein), (b) any reference herein to any Person shall be construed to include such Person's successors and assigns, (c) the words "herein", "hereof" and "hereunder", and words of similar import, shall be construed to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights. Section 1.03 Accounting Terms; GAAP Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time, provided that, if the Borrower notifies the Lender that the Borrower requests an amendment to any provision hereof to eliminate the effect of any change occurring after the date hereof in GAAP or in the application thereof on the operation of such provision (or if the Lender notifies the Borrower that it requests an amendment to any provision hereof for such purpose), regardless of whether any such notice is given before or after such change in GAAP or in the application thereof, then such provision shall be interpreted on the basis of GAAP as in effect and applied immediately before such change shall have become effective until such notice shall have been withdrawn or such provision amended in accordance herewith. Unless the context otherwise requires, any reference to a fiscal period shall refer to the relevant fiscal period of the Borrower. -12- ARTICLE 2. THE CREDITS Section 2.01 Commitment Subject to the terms and conditions set forth herein, the Lender agrees to make Loans to the Borrower from time to time during the Availability Period in an aggregate principal amount that will not result in the Credit Exposure exceeding the Available Amount. Within the foregoing limits and subject to the terms and conditions set forth herein, the Borrower may borrow, prepay and reborrow Loans. At the time that each Loan is made, such Loan shall be in an aggregate amount that is an integral multiple of $100,000 and not less than $1,000,000, provided that a Loan may be in an aggregate amount that is equal to the entire unused balance of the Commitment. Section 2.02 Requests for Loans To request a Loan, the Borrower shall notify the Lender of such request by telephone not later than 11:00 a.m., New York City time, on the date of the proposed Loan. Each such telephonic Borrowing Request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Lender of a written Borrowing Request in a form approved by the Lender and signed by the Borrower. Each such telephonic and written Borrowing Request shall specify the following information: (i) the aggregate amount of the requested Loan; (ii) the date of such Loan, which shall be a Business Day; (iii) the location and number of the Borrower's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.03; and (iv) a reasonably detailed calculation of the Leverage Ratio on a pro forma basis immediately after giving effect to such Loan and the use of the proceeds thereof. Section 2.03 Funding of Loans Subject to Sections 5.02 and 5.03, the Lender shall make each Loan on the proposed date thereof by 2:00 p.m., New York City time, by crediting or otherwise transferring the proceeds of the requested Loan to an account of the Borrower maintained with the Lender and designated by the Borrower in the applicable Borrowing Request. Section 2.04 Termination and Reduction of Commitment (a) Unless previously terminated, the Commitment shall terminate on the Commitment Termination Date. (b) The Borrower may at any time terminate, or from time to time reduce, the Commitment, provided that (i) the Borrower shall not terminate or reduce the Commitment if, -13- after giving effect to any concurrent prepayment of the Loans in accordance with Section 2.06, the Credit Exposure would exceed the Commitment, and (ii) each such reduction (other than a termination) shall be in an amount that is an integral multiple of $100,000 and not less than $1,000,000. (c) The Borrower shall notify the Lender of any election to terminate or reduce the Commitment under paragraph (b) of this Section at least three Business Days prior to the effective date of such termination or reduction, specifying such election and the effective date thereof. Each notice delivered by the Borrower pursuant to this Section shall be irrevocable, provided that a notice of termination of the Commitment delivered by the Borrower may state that such notice is conditioned upon the effectiveness of other credit facilities, in which case such notice may be revoked by the Borrower (by notice to the Lender on or prior to the specified effective date) if such condition is not satisfied. Any termination or reduction of the Commitment hereunder shall be permanent. Section 2.05 Repayment of Loans; Evidence of Debt (a) The Borrower hereby unconditionally promises to pay to the Lender the then unpaid principal amount of each Loan on the Maturity Date. (b) If on any day the Credit Exposure exceeds the Available Amount, the Borrower shall, no later than the following Business Day, prepay the Loans in an amount equal to such excess. (c) The Lender shall maintain accounts in which it shall record (i) the amount of each Loan made hereunder, (ii) the amount of any principal or interest due and payable or to become due and payable from the Borrower to the Lender hereunder and (iii) the amount of any sum received by the Lender hereunder. The entries made in such accounts shall, to the extent not inconsistent with any entries made in any Note, be prima facie evidence of the existence and amounts of the obligations recorded therein, provided that the failure of the Lender to maintain such accounts or any error therein shall not in any manner affect the obligation of the Borrower to repay the Loans in accordance with the terms of this Agreement. (d) The Loans evidenced by the Note and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by one or more Notes in like form payable to the order of the payee named therein and its registered assigns. Section 2.06 Prepayment of Loans (a) The Borrower shall have the right at any time and from time to time to prepay any Loan in whole or in part, subject to the requirements of this Section. (b) In the event of any partial reduction or termination of the Commitment, then (i) at or prior to the date of such reduction or termination, the Lender shall notify the Borrower of the Credit Exposure after giving effect thereto and (ii) if such sum would exceed the Commitment after giving effect to such reduction or termination, then the Borrower shall, on the -14- date of such reduction or termination, prepay Loans in an amount sufficient to eliminate such excess. (c) The Borrower shall notify the Lender by telephone (confirmed by telecopy) of any prepayment not later than 11:00 a.m., New York City time, on the date of prepayment. Each such notice shall be irrevocable and shall specify the prepayment date and the principal amount of each Loan or portion thereof to be prepaid, provided that, if a notice of prepayment is given in connection with a conditional notice of termination of the Commitment as contemplated by Section 2.04, then such notice of prepayment may be revoked if such notice of termination is revoked in accordance with Section 2.04. Each partial prepayment of any Loan under Sections 2.04(b) and 2.06(a) shall, when added to the amount of each concurrent reduction of the Commitment and prepayment of Loans under such Sections, be in an integral multiple $100,000 and not less than $1,000,000. Prepayments shall be accompanied by accrued interest to the extent required by Section 3.01. Section 2.07 Payments Generally; Pro Rata Treatment; Sharing of Setoffs (a) The Borrower shall make each payment required to be made by it hereunder or under any other Loan Document (whether of principal of Loans, interest or fees, or of amounts payable under Section 3.03, 3.04 or 9.03, or otherwise) prior to 12:00 noon, New York City time, on the date when due, in immediately available funds, without setoff or counterclaim. Any amounts received after such time on any date may, in the discretion of the Lender, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments shall be made to the Lender by wire transfer to Account No. GLA 111231, ABA 021000018, or to such other account as to which the Lender may notify the Borrower in writing from time to time. If any payment hereunder shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments hereunder shall be made in dollars. (b) If at any time insufficient funds are received by and available to the Lender to pay fully all amounts of principal of Loans, interest, fees and commissions then due hereunder, such funds shall be applied (i) first, towards payment of interest, fees and commissions then due hereunder, and (ii) second, towards payment of principal of Loans then due hereunder. ARTICLE 3. INTEREST, FEES, YIELD PROTECTION, ETC. Section 3.01 Interest (a) Each Loan shall bear interest at the Alternate Base Rate for the period from the date such Loan is made until the date which is two weeks thereafter and thereafter, if applicable, at the Alternate Base Rate plus 2%. -15- (b) Notwithstanding the foregoing, if an Event of Default has occurred and is continuing, then, so long as such Event of Default is continuing, all principal of and interest on each Loan and each fee and other amount payable by the Borrower hereunder shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of principal of any Loan, 2% plus the rate otherwise applicable to such Loan as provided in the preceding paragraph of this Section or (ii) in the case of any other amount, 2% plus the Alternate Base Rate. (c) Accrued interest on each Loan shall be payable in arrears on the last day of each March, June, September and December, provided that (i) interest accrued pursuant to paragraph (b) of this Section shall be payable on demand and (ii) in the event of any repayment or prepayment of any Loan, accrued interest on the principal amount repaid or prepaid shall be payable on the date of such repayment or prepayment. (d) All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed at times when the Alternate Base Rate is based on the Prime Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate shall be determined by the Lender, and such determination shall be conclusive absent clearly demonstrable error. Section 3.02 Fees (a) The Borrower agrees to pay to the Lender for its own account, a commitment fee, which shall accrue at a rate per annum equal to 0.35% on the daily amount of the unused Commitment during the period from and including the Effective Date to but excluding the Commitment Termination Date. Accrued commitment fees shall be payable in arrears on the last day of March, June, September and December of each year, each date on which the Commitment is permanently reduced and on the date on which the Commitment terminates, commencing on the first such date to occur after the date hereof. All commitment fees shall be computed on the basis of a year of 365 days (or 366 days in a leap year) and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (b) The Borrower agrees to pay to the Lender for its own account, an upfront fee equal to 1.50% of the Commitment, of which one-half shall be payable on the Effective Date and the balance on the Initial Transaction Date. (c) Unless on or before July 31, 1999, (i) the Net Capital of ITG (calculated without regard to loans made by the Borrower to ITG with the proceeds of the Loans) is greater than or equal to the sum of the Commitment on such date plus $5,000,000, and (ii) Consolidated Shareholders' Equity is greater than or equal to $80,000,000, the Borrower agrees to pay to the Lender for its own account, an additional fee equal to $500,000, payable on such date. (d) The Borrower agrees to pay to the Lender, for its own account, fees and other amounts payable in the amounts and at the times separately agreed upon between the Borrower and the Lender. -16- (e) All fees and other amounts payable hereunder shall be paid on the dates due, in immediately available funds, to the Lender. Fees and other amounts paid shall not be refundable under any circumstances. Section 3.03 Capital Adequacy (a) If the Lender determines that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on the Lender's capital or on the capital of the Lender's holding company as a consequence of this Agreement or the Loans made by the Lender to a level below that which the Lender or the Lender's holding company could have achieved but for such Change in Law (taking into consideration the Lender's policies and the policies of the Lender's holding company with respect to capital adequacy), then from time to time the Borrower will pay to the Lender such additional amount or amounts as will compensate the Lender or the Lender's holding company for any such reduction suffered. (b) A certificate of the Lender setting forth the amount or amounts necessary to compensate the Lender or its holding company, as applicable, as specified in paragraph (a) of this Section shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay the Lender the amount shown as due on any such certificate within 10 days after receipt thereof. Failure or delay on the part of the Lender to demand compensation pursuant to this Section shall not constitute a waiver of the Lender's right to demand such compensation. Section 3.04 Taxes (a) Any and all payments by or on account of any obligation of the Borrower hereunder and under any other Loan Document shall be made free and clear of and without deduction for any Indemnified Taxes or Other Taxes, provided that, if the Borrower shall be required to deduct any Indemnified Taxes or Other Taxes from such payments, then (i) the sum payable shall be increased as necessary so that, after making all required deductions (including deductions applicable to additional sums payable under this Section), the Lender receives an amount equal to the sum it would have received had no such deductions been made, (ii) the Borrower shall make such deductions and (iii) the Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. (b) In addition, the Borrower shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law. (c) The Borrower shall indemnify the Lender, within ten days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by the Lender on or with respect to any payment by or on account of any obligation of the Borrower under the Loan Documents (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrower by the Lender shall be conclusive absent manifest error. -17- (d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by the Borrower to a Governmental Authority that were deducted under Section 3.04(a), the Borrower shall deliver to the Lender the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Lender. Section 3.05 Mitigation Obligations If the Lender requests compensation under Section 3.03, or if the Borrower is required to pay any additional amount to the Lender or any Governmental Authority for the account of the Lender pursuant to Section 3.04, then the Lender shall use reasonable efforts to designate a different lending office for funding or booking its Loans (or any participation therein) hereunder or to assign its rights and obligations hereunder to another of its offices, branches or affiliates, if, in the judgment of the Lender, such designation or assignment (i) would eliminate or reduce amounts payable pursuant to Section 3.03 or 3.04, as applicable, in the future and (ii) would not subject the Lender to any unreimbursed cost or expense and would not otherwise be disadvantageous to the Lender. The Borrower hereby agrees to pay all reasonable costs and expenses incurred by the Lender in connection with any such designation or assignment. ARTICLE 4. REPRESENTATIONS AND WARRANTIES The Borrower represents and warrants to the Lender that: Section 4.01 Organization; Powers Each of the Borrower and the Subsidiaries is duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization, has all requisite power and authority to carry on its business as now conducted and, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, is qualified to do business in, and is in good standing in, every jurisdiction where such qualification is required. Section 4.02 Authorization; Enforceability The Transactions are within the corporate, partnership or other analogous powers of each of the Borrower and the Subsidiaries to the extent it is a party thereto and have been duly authorized by all necessary corporate, partnership or other analogous and, if required, equityholder action. Each Loan Document has been duly executed and delivered by each of the Borrower and the Subsidiaries to the extent it is a party thereto and constitutes a legal, valid and binding obligation thereof, enforceable in accordance with its terms, subject to applicable bankruptcy, insolvency, reorganization, moratorium or other laws affecting creditors' rights generally. -18- Section 4.03 Governmental Approvals; No Conflicts The Transactions (a) do not require any consent or approval of, registration or filing with, or any other action by, any Governmental Authority, except such as have been obtained or made and are in full force and effect, (b) will not violate any applicable law or regulation or the charter, by-laws or other organizational documents of the Borrower or any of the Subsidiaries or any order of any Governmental Authority, (c) will not violate or result in a default under any indenture, agreement or other instrument binding upon the Borrower or any of the Subsidiaries or its assets, or give rise to a right thereunder to require any payment to be made by the Borrower or any of the Subsidiaries, and (d) will not result in the creation or imposition of any Lien on any asset of the Borrower or any of the Subsidiaries other than Liens expressly permitted by Section 7.02. Section 4.04 Financial Condition; No Material Adverse Change (a) The Borrower has heretofore furnished to the Lender its Form 10-K for the fiscal year ended December 31, 1998 containing the consolidated statement of financial condition and statements of income, changes in stockholders' equity and cash flows of the Borrower and the Subsidiaries as of and for the fiscal year ended December 31, 1998 and 1997, reported on by KPMG LLP, independent public accountants. The consolidated financial statements referred to in the preceding sentence present fairly, in all material respects, the financial condition and results of operations of the Borrower and consolidated Subsidiaries as of such dates and for the indicated periods in accordance with GAAP and are consistent with the books and records of the Borrower (which books and records are correct and complete). (b) The contents of the FOCUS Report of ITG as of December 31, 1998, a copy of which has been furnished to the Lender, are correct in all material respects. (c) Since December 31, 1998, there has been no material adverse change in the business, assets, operations, prospects or condition, financial or otherwise, of the Borrower and the Subsidiaries, taken as a whole. Section 4.05 Properties (a) Each of the Borrower and the Subsidiaries has good title to, or valid leasehold interests in, all its real and personal property material to its business, except for minor defects in title that do not interfere with its ability to conduct its business as currently conducted or to utilize such properties for their intended purposes. (b) Each of the Borrower and the Subsidiaries owns, or is entitled to use, all trademarks, tradenames, copyrights, patents and other intellectual property material to its business, and the use thereof by the Borrower and the Subsidiaries does not infringe upon the rights of any other Person, except for any such infringements that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. -19- Section 4.06 Litigation and Environmental Matters (a) There are no actions, suits or proceedings by or before any arbitrator or Governmental Authority pending against or, to the knowledge of the Borrower, threatened against or affecting the Borrower or any of the Subsidiaries (i) that, if adversely determined, could reasonably be expected, individually or in the aggregate, to result in a Material Adverse Effect (other than the Disclosed Matters) or (ii) that involve any Loan Document or the Transactions. (b) Except for the Disclosed Matters and except with respect to any other matters that, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect, neither the Borrower nor any of its Subsidiaries (i) have failed to comply with any Environmental Law or to obtain, maintain or comply with any permit, license or other approval required under any Environmental Law, (ii) have become subject to any Environmental Liability, (iii) have received notice of any claim with respect to any Environmental Liability or (iv) know of any basis for any Environmental Liability. (c) Since the date of this Agreement, there has been no change in the status of the Disclosed Matters that, individually or in the aggregate, has resulted in, or materially increased the likelihood of, a Material Adverse Effect. Section 4.07 Compliance with Laws and Agreements Each of the Borrower and the Subsidiaries is in compliance with all laws, regulations and orders of any Governmental Authority applicable to it or its property and all indentures, agreements and other instruments binding upon it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. No Default has occurred and is continuing. Section 4.08 Investment and Holding Company Status Neither the Borrower nor any of the Subsidiaries are (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. Section 4.09 Taxes Except as set forth on Schedule 4.06, each of the Borrower and the Subsidiaries has timely filed or caused to be filed all Tax returns and reports required to have been filed by it and has paid or caused to be paid all Taxes required to have been paid by it, except (a) Taxes that are being contested in good faith by appropriate proceedings and for which the Borrower or such Subsidiary, as applicable, has set aside on its books adequate reserves or (b) to the extent that the failure to do so could not reasonably be expected to result in a Material Adverse Effect. -20- Section 4.10 ERISA No ERISA Event has occurred or is reasonably expected to occur that, when taken together with all other such ERISA Events for which liability is reasonably expected to occur, could reasonably be expected to result in a Material Adverse Effect. Except as provided in Schedule 4.10, the present value of all accumulated benefit obligations under each Plan (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $1,600,000 the fair market value of the assets of such Plan, and the present value of all accumulated benefit obligations of all underfunded Plans (based on the assumptions used for purposes of Statement of Financial Accounting Standards No. 87) did not, as of the date of the most recent financial statements reflecting such amounts, exceed by more than $1,600,000 the fair market value of the assets of all such underfunded Plans. Section 4.11 Disclosure The Borrower has disclosed to the Lender or made public all agreements, instruments and corporate or other restrictions to which it or any of the Subsidiaries is subject, and all other matters known to it, that, individually or in the aggregate, could reasonably be expected to result in a Material Adverse Effect. None of the reports, financial statements, certificates or other information furnished by or on behalf of the Borrower or any Subsidiary to the Lender in connection with the negotiation of the Loan Documents or delivered thereunder (as modified or supplemented by other information so furnished) contains any material misstatement of fact or omits to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, provided that, with respect to projected financial information, the Borrower represents only that such information was prepared in good faith based upon assumptions believed to be reasonable at the time. Section 4.12 Subsidiaries Schedule 4.12 sets forth the name and jurisdiction of incorporation of, and the ownership interest of the Borrower in, each Subsidiary as of the Effective Date. Section 4.13 Labor Matters As of the Effective Date, there are no strikes, lockouts or slowdowns against the Borrower or any Subsidiary pending or, to the knowledge of the Borrower, threatened. The hours worked by and payments made to employees of the Borrower and the Subsidiaries have not been in violation of the Fair Labor Standards Act or any other applicable Federal, state, local or foreign law dealing with such matters, except where any such violations, individually and in the aggregate, would not be reasonably likely to result in a Material Adverse Effect. All material payments due from the Borrower or any Subsidiary, or for which any claim may be made against the Borrower or any Subsidiary, on account of wages and employee health and welfare insurance and other benefits, have been paid or accrued as a liability on the books of the Borrower or such Subsidiary. The consummation of the Transactions will not give rise to any right of termination -21- or right of renegotiation on the part of any union under any collective bargaining agreement to which the Borrower or any Subsidiary is bound. Section 4.14 Solvency Immediately after the consummation of each Transaction and immediately following the making of each Loan, if any, made on the date thereof and after giving effect to the application of the proceeds of such Loan, (a) the fair value of the assets of the Borrower and the Subsidiaries, taken as a whole, at a fair valuation, will exceed their debts and liabilities, subordinated, contingent or otherwise; (b) the present fair saleable value of the property of the Borrower and the Subsidiaries, taken as a whole, will be greater than the amount that will be required to pay the probable liability of their debts and other liabilities, subordinated, contingent or otherwise, as such debts and other liabilities become absolute and matured; (c) the Borrower will be able to pay its debts and liabilities, subordinated, contingent or otherwise, as such debts and liabilities become absolute and matured; and (d) the Borrower will not have unreasonably small capital with which to conduct the business in which it is engaged as such business is now conducted and is proposed to be conducted following such date. Section 4.15 Security Documents (a) The Security Agreement is effective to create in favor of the Lender a legal, valid and enforceable security interest in the Collateral (as defined in the Security Agreement) and, when (i) the pledged property constituting such Collateral is delivered to the Lender, (ii) the financing statements in appropriate form are filed in the offices specified on Schedule 5 to the Perfection Certificate and (iii) all other applicable filings under the Uniform Commercial Code or otherwise that are required under the Loan Documents are made, the Security Agreement shall constitute a fully perfected Lien on, and security interest in, all right, title and interest of the Borrower thereunder in such Collateral, in each case prior and superior in right to any other Person, other than with respect to Liens expressly permitted by Section 7.02. Section 4.16 Federal Reserve Regulations (a) Neither the Borrower nor any of the Subsidiaries (other than ITG) are engaged principally, or as one of their important activities, in the business of extending credit for the purpose of buying or carrying Margin Stock. ITG is a broker and dealer subject to the provisions of Regulation T. ITG maintains procedures and internal controls reasonably adapted to insure that ITG does not extend or maintain credit to or for its customers other than in accordance with the provisions of Regulation T, and officers of ITG regularly supervise its activities and the activities of employees of ITG to insure that ITG does not extend or maintain credit to or for its customers other than in accordance with the provisions of Regulation T, except for occasional inadvertent failures to comply with Regulation T in connection with transactions which are not material either in number or amount. (b) No part of the proceeds of any Loan will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, to purchase, acquire or carry any -22- Margin Stock or for any purpose that entails a violation of, or that is inconsistent with, the provisions of the regulations of the Board, including Regulation T, U or X. Section 4.17 Membership ITG is a member organization in good standing of the NASD and is duly registered as a broker-dealer with the Securities and Exchange Commission. Section 4.18 Assessments by the SIPC ITG is not in arrears with respect to any assessment which the Borrower has received from the SIPC and which is currently due or past due. Section 4.19 Year 2000 Any reprogramming required to permit the proper functioning, in and following the year 2000, of (i) the Borrower's and the Subsidiaries' computer systems and (ii) equipment containing embedded microchips (including systems and equipment supplied by others) and the testing of all such systems and equipment, as so reprogrammed, will be completed by September 30, 1999. The cost to the Borrower and the Subsidiaries of such reprogramming and testing and of the reasonably foreseeable consequences of year 2000 to the Borrower and the Subsidiaries (including reprogramming errors and the failure of others' systems or equipment) would not reasonably be expected to result in a Default or a Material Adverse Effect. Except for such of the reprogramming referred to in the preceding sentence as may be necessary, the computer and management information systems of the Borrower and the Subsidiaries are and, with ordinary course upgrading and maintenance, will continue for the term of this Agreement to be, sufficient to permit the Borrower and the Subsidiaries to conduct their business, except for those failures that would not, individually or in the aggregate, reasonably be expected to result in a Material Adverse Effect. ARTICLE 5. CONDITIONS Section 5.01 Effective Date This Agreement shall not become effective until the date on which each of the following conditions is satisfied (or waived in accordance with Section 9.02): (a) The Lender (or its counsel) shall have received from the Borrower either (i) a counterpart of this Agreement signed on behalf of the Borrower or (ii) written evidence satisfactory to the Lender (which may include telecopy transmission of a signed signature page of this Agreement) that the Borrower has signed a counterpart of this Agreement. (b) The Lender shall have received a Note signed on behalf of the Borrower. (c) The Lender shall have received a favorable written opinion (addressed to the Lender and dated the Effective Date) from Cahill Gordon & Reindel, counsel to the -23- Borrower, substantially in the form of Exhibit B. The Borrower hereby requests such counsel to deliver such opinion. (d) The Lender shall have received such documents and certificates as the Lender or its counsel may reasonably request relating to the organization, existence and good standing of the Borrower, the authorization of the Loan Documents and any other legal matters relating to the Borrower, the Loan Documents or the transactions contemplated thereby, all in form and substance reasonably satisfactory to the Lender and its counsel. (e) The Lender shall have received a certificate, dated the Effective Date and signed by the President, a Vice President or a Financial Officer, confirming compliance with the conditions set forth in paragraphs (a) and (b) of Section 5.03. (f) The Lender shall have received all fees and other amounts due it from the Borrower and payable on or prior to the Effective Date, including, to the extent invoiced, reimbursement or payment of all reasonable fees and disbursements of Lender's counsel and other out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder. (g) The Lender shall have received a Federal Reserve Form U-1 duly executed by the Borrower and satisfactory to the Lender. (h) The Lender shall have received (i) a true and complete copy of the POSIT License Agreement and (ii) a letter from the POSIT Joint Venture with respect to the timely payment by ITG of all royalties thereunder (subject to audit), such letter to be in all respects satisfactory to the Lender. (i) After giving effect to the Transactions to be consummated on the Effective Date, none of the Borrower or any of the Subsidiaries shall have outstanding any shares of preferred equity securities or any Indebtedness, other than (i) Indebtedness incurred under the Loan Documents and (ii) Indebtedness permitted under Section 7.01. (j) The Lender shall have received a true, complete and correct copy of each Initial Transaction Document, which shall be in form and substance reasonably satisfactory to the Lender. (k) The Lender shall have received a copy of a private letter ruling of the Internal Revenue Service which states that the Initial Transactions shall be tax-free to the Borrower. The Lender shall notify the Borrower of the Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligations of the Lender to make Loans hereunder shall not become effective unless each of the foregoing conditions and each of the conditions set forth in Section 5.02 is satisfied (or waived pursuant to Section 9.02) at or prior to 3:00 p.m., New York City time, on May 15, 1999 (and, in the event such conditions are not so satisfied or waived, the Commitment shall terminate at such time). -24- Section 5.02 Conditions to First Loans The obligations of the Lender to make the initial Loans shall be subject to the prior or contemporaneous satisfaction of the conditions set forth in Section 5.01 and the satisfaction (or waiver in accordance with Section 9.02) of the following additional conditions: (a) The Lender shall have received counterparts of the Assumption Agreement signed on behalf of Jefferies Group. (b) The Lender shall have received such documents and certificates as the Lender or its counsel may reasonably request relating to the organization, existence and good standing of Jefferies Group, the authorization by Jefferies Group of the Transactions and any other legal matters relating to Jefferies Group, the Loan Documents or the Transactions, all in form and substance reasonably satisfactory to the Lender and its counsel. (c) The Lender shall have received such documents and certificates as the Lender or its counsel may reasonably request relating to the absence of changes to the documentation delivered by the Borrower pursuant to Section 5.01(d) and the continued effectiveness thereof, and attaching resolutions of its board of directors authorizing the Initial Transactions and the Initial Transaction Documents, all in form and substance reasonably satisfactory to the Lender and its counsel. (d) The Lender shall have received counterparts of the Security Agreement signed on behalf of the Borrower, together with the following: (i) all stock certificates representing shares of capital stock of all Domestic Subsidiaries owned by or on behalf of the Borrower as of the Effective Date after giving effect to the Transactions; (ii) stock powers and instruments of transfer, endorsed in blank, with respect to such stock certificates, promissory notes and other instruments; (iii) all instruments and other documents, including Uniform Commercial Code financing statements, required by law or reasonably requested by the Lender to be filed, registered or recorded to create or perfect the Liens intended to be created under the Security Agreement; and (iv) a completed Perfection Certificate, dated the Effective Date and signed by the President, a Vice President or a Financial Officer and the chief legal officer of the Borrower, together with all attachments contemplated thereby, including the results of a search of the Uniform Commercial Code (or equivalent) filings made with respect to the Borrower in the jurisdictions contemplated by the Perfection Certificate and copies of the financing statements (or similar documents) disclosed by such search and evidence reasonably satisfactory to the Lender that the Liens indicated by such financing statements (or similar documents) are permitted by Section 7.02 or have been released. -25- (e) After giving effect to the Initial Transactions, the (i) Net Capital of ITG shall be greater than or equal to the Commitment and (ii) Consolidated Shareholders' Equity shall be greater than or equal to $70,000,000, and the Lender shall have received a certificate of a Financial Officer, in form and substance reasonably satisfactory to the Lender, to the foregoing effects. (f) The Lender shall have received a certificate, dated the Initial Transaction Date and signed by the President, a Vice President or a Financial Officer, (i) confirming that each Initial Transaction has been consummated in accordance with the terms and conditions of the applicable Initial Transaction Documents (with no waiver or amendment of any provision thereof without the prior written consent of the Lender), (ii) confirming that there has been no change to the Initial Transaction Documents as delivered to the Lender pursuant to Section 5.01 and (iii) attaching a copy of a certificate of merger issued by the Secretary of State of the State of Delaware with respect to the merger of the Borrower with and into Jefferies Group. (g) The Lender shall have received a certificate, signed by a Financial Officer, setting forth reasonably detailed calculations demonstrating compliance with Sections 7.12, 7.13, 7.14 and 7.15, on a pro forma basis immediately after giving effect to the Transactions. (h) The Lender shall have received a favorable written opinion (addressed to the Lender and dated the Initial Transaction Date) from Cahill Gordon & Reindel, counsel to the Borrower, substantially in the form of Exhibit B-1. The Borrower hereby requests such counsel to deliver such opinion. (i) The Lender shall have received all reasonable fees and other amounts due it from the Borrower and payable on or prior to the Initial Transaction Date, including, to the extent invoiced and not theretofore paid, reimbursement or payment of all reasonable fees and disbursements of Lender's counsel and other out-of-pocket expenses required to be reimbursed or paid by the Borrower hereunder. (j) In the event that the Borrower shall have delivered any of the certificates required by Section 5.02(b), (e) or (g) prior to the Initial Transaction Date, the Lender shall have received a certificate, dated the date of the consummation of the Initial Transactions and signed by the President, a Vice President or a Financial Officer, certifying that the information contained in any such certificate is true and correct as of the Initial Transaction Date. (k) After giving effect to the Transactions to be consummated on the Initial Transaction Date, none of the Borrower or any of the Subsidiaries shall have outstanding any shares of preferred equity securities or any Indebtedness, other than (i) Indebtedness incurred under the Loan Documents and (ii) Indebtedness permitted under Section 7.01. Section 5.03 Each Credit Event The obligation of the Lender to make a Loan is subject to the satisfaction of the following conditions: -26- (a) The representations and warranties of the Borrower set forth in each Loan Document shall be true and correct on and as of the date of such Loan. (b) At the time of and immediately after giving effect to such Loan no Default shall have occurred and be continuing. Each Loan shall be deemed to constitute a representation and warranty by the Borrower on the date thereof as to the matters specified in paragraphs (a) and (b) of this Section. ARTICLE 6. AFFIRMATIVE COVENANTS Until the Commitment have expired or been terminated and the principal of and interest on each Loan and all fees and other amounts payable under the Loan Documents shall have been paid in full, the Borrower covenants and agrees with the Lender that: Section 6.01 Financial Statements and Other Information The Borrower will furnish to the Lender: (a) within 90 days after the end of each fiscal year, (i) its Form 10-K containing its audited consolidated statement of financial condition and related statements of income, changes in stockholders' equity and cash flows as of the end of and for such year, setting forth in each case in comparative form the figures for the previous fiscal year, all reported on by KPMG LLP or other independent public accountants of recognized national standing (without a "going concern" or like qualification or exception and without any qualification or exception as to the scope of such audit) to the effect that such consolidated financial statements present fairly in all material respects the financial condition and results of operations of the Borrower and its consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied; (b) within 45 days after the end of each of the first three fiscal quarters of each fiscal year, its Form 10-Q containing its consolidated statement of financial condition and related statements of income, changes in stockholders' equity and cash flows as of the end of and for such fiscal quarter and the then elapsed portion of the fiscal year, setting forth in each case in comparative form the figures for the corresponding period or periods of (or, in the case of the balance sheet, as of the end of) the previous fiscal year, all certified by one of its Financial Officers as presenting fairly in all material respects the financial condition and results of operations of the Borrower and the consolidated Subsidiaries on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments and the absence of footnotes; (c) concurrently with any delivery of financial statements under clause (a) and (b) above, a certificate of a Financial Officer (i) certifying as to whether a Default has occurred and, if a Default has occurred, specifying the details thereof and any action taken or proposed to be taken with respect thereto, (ii) setting forth reasonably detailed calculations demonstrating compliance with Sections 7.12, 7.13, 7.14 and 7.15, and (iii) stating whether any change in -27- GAAP or in the application thereof has occurred since the date of the audited financial statements referred to in Section 4.04 and, if any such change has occurred, specifying the effect of such change on the financial statements accompanying such certificate; (d) concurrently with any delivery of financial statements under clause (a) above, a certificate of the accounting firm that reported on such financial statements stating whether they obtained knowledge during the course of their examination of such financial statements of any Default (which certificate may be limited to the extent required by accounting rules or guidelines); (e) As soon as available and in any event within 30 days after filing thereof, copies of all quarterly FOCUS reports and notices of all material violations of rules and regulations of the Securities and Exchange Commission or any material securities exchange which the Borrower or any Subsidiary shall file with the Securities and Exchange Commission or any material securities exchange; (f) promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by the Borrower or any Subsidiary with the Securities and Exchange Commission, or any Governmental Authority succeeding to any or all of the functions of said Commission, or with any national securities exchange, or distributed by the Borrower to its shareholders generally, as the case may be; and (g) promptly following any request therefor, such other information regarding the operations, business affairs and financial condition of the Borrower or any Subsidiary, or compliance with the terms of the Loan Documents, as the Lender may reasonably request. Section 6.02 Notices of Material Events The Borrower will furnish to the Lender prompt written notice of the following: (a) the occurrence of any Default; (b) the determination by the Borrower that any action, suit or proceeding by or before any arbitrator or Governmental Authority against or affecting the Borrower or any Affiliate thereof, whether newly commenced or ongoing could, if adversely determined, in the good faith opinion of the Borrower reasonably be expected to result in a Material Adverse Effect; (c) immediately upon becoming aware of the occurrence thereof, notice of the suspension or expulsion of ITG from membership in the NASD; (d) the occurrence of any ERISA Event that, alone or together with any other ERISA Events that have occurred, could reasonably be expected to result in liability of the Borrower and the Subsidiaries in an aggregate amount exceeding $1,000,000, and (e) any other development that results in, or could reasonably be expected to result in, a Material Adverse Effect. -28- Each notice delivered under this Section shall be accompanied by a statement of a Financial Officer or other executive officer of the Borrower setting forth the details of the event or development requiring such notice and any action taken or proposed to be taken with respect thereto. Section 6.03 Existence; Conduct of Business The Borrower will, and will cause each of the Subsidiaries to, do or cause to be done all things necessary to preserve, renew and keep in full force and effect its legal existence and the rights, licenses, permits, privileges and franchises material to the conduct of its business, provided that the foregoing shall not prohibit any merger, consolidation, liquidation or dissolution permitted under Section 7.03. Section 6.04 Payment of Obligations The Borrower will, and will cause each of the Subsidiaries to, pay its obligations, including Tax liabilities, that, if not paid, would reasonably be expected to result in a Material Adverse Effect before the same shall become delinquent or in default, except where (a) the validity or amount thereof is being contested in good faith by appropriate proceedings, (b) the Borrower or such Subsidiary has set aside on its books adequate reserves with respect thereto in accordance with GAAP and (c) the failure to make payment pending such contest could not reasonably be expected to result in a Material Adverse Effect. Section 6.05 Maintenance of Properties The Borrower will, and will cause each of the Subsidiaries to, keep and maintain all property material to the conduct of its business in good working order and condition, ordinary wear and tear excepted. Section 6.06 Books and Records; Inspection Rights The Borrower will, and will cause each of the Subsidiaries to, keep proper books of record and account in which full, true and correct entries are made of all dealings and transactions in relation to its business and activities. The Borrower will, and will cause each of the Subsidiaries to, permit any representatives designated by the Lender, upon reasonable prior notice, to visit and inspect its properties, to examine and make extracts from its books and records, and to discuss its affairs, finances and condition with its officers and independent accountants, all at such reasonable times and as often as reasonably requested. Section 6.07 Compliance with Laws The Borrower will, and will cause each of the Subsidiaries to, comply with all laws, rules, regulations and orders of any Governmental Authority applicable to it or its property, except where the failure to do so, individually or in the aggregate, could not reasonably be expected to result in a Material Adverse Effect. -29- Section 6.08 Use of Proceeds The proceeds of the Loans will be used only (a) to consummate the Initial Transactions and (b) to repay intercompany loans from ITG to the Borrower or make subordinated loans to ITG in order to enable ITG to satisfy its Net Capital requirements. No part of the proceeds of any Loan will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, to purchase, acquire or carry any Margin Stock or for any purpose that entails a violation of any of the regulations of the Board, including Regulations T, U and X. Section 6.09 Information Regarding Collateral (a) The Borrower will furnish to the Lender prompt written notice of any change in (i) the legal name of the Borrower or in any trade name used to identify it in the conduct of its business or in the ownership of its properties, (ii) the location of the chief executive office of the Borrower, its principal place of business, any office in which it maintains books or records relating to Collateral owned or held by it or on its behalf (including the establishment of any such new office or facility), (iii) the identity or organizational structure of the Borrower such that a filed financing statement becomes misleading or (iv) the Federal Taxpayer Identification Number of the Borrower. The Borrower agrees not to effect or permit any change referred to in the preceding sentence unless all filings have been made under the Uniform Commercial Code or otherwise that are required in order for the Lender to continue at all times following such change to have a valid, legal and perfected security interest in all the Collateral. The Borrower also agrees promptly to notify the Lender if any material portion of the Collateral is damaged or destroyed. (b) Each year, at the time of delivery of annual financial statements with respect to the preceding fiscal year pursuant to clause (a) of Section 6.01, the Borrower shall deliver to the Lender a certificate of a Financial Officer and the chief legal officer of the Borrower, (i) setting forth the information required pursuant to Sections 1, 2 and 7 of the Perfection Certificate or confirming that there has been no change in such information since the date of the Perfection Certificate or the date of the most recent certificate delivered pursuant to this Section and (ii) certifying that all Uniform Commercial Code financing statements or other appropriate filings, recordings or registrations, including all refilings, rerecordings and reregistrations, containing a description of the Collateral have been filed of record in each governmental, municipal or other appropriate office in each jurisdiction identified pursuant to clause (i) above, and all other actions have been taken, to the extent necessary to protect and perfect the security interests under the Security Agreement for a period of not less than 18 months after the date of such certificate (except as noted therein with respect to any continuation statements to be filed within such period). Section 6.10 Insurance The Borrower will, and will cause each of the Subsidiaries to, maintain, with financially sound and reputable insurance companies, (a) adequate insurance for its insurable properties, all to such extent and against such risks, including fire, casualty, business interruption -30- and other risks insured against by extended coverage, as is customary with companies in the same or similar businesses operating in the same or similar locations and (b) such other insurance as is required pursuant to the terms of any Security Document. Section 6.11 Additional Domestic Subsidiaries If any Domestic Subsidiary is formed or acquired after the Effective Date, the Borrower will notify the Lender in writing thereof within five Business Days after the date on which such Domestic Subsidiary is formed or acquired and will cause such equity securities to be pledged pursuant to the Security Agreement within five Business Days after the date on which such Domestic Subsidiary is formed or acquired. Section 6.12 Further Assurances The Borrower will execute any and all further documents, financing statements, agreements and instruments, and take all such further actions (including the filing and recording of financing statements and other documents), that may be required under any applicable law, or which the Lender may reasonably request, to effectuate the transactions contemplated by the Loan Documents or to grant, preserve, protect or perfect the Liens created or intended to be created by the Security Documents or the validity or priority of any such Lien, all at the expense of the Borrower. The Borrower also agrees to provide to the Lender, from time to time upon request, evidence reasonably satisfactory to the Lender as to the perfection and priority of the Liens created or intended to be created by the Security Documents. Section 6.13 Environmental Compliance The Borrower shall, and shall cause each of its Subsidiaries to, use and operate all of its facilities and property in compliance with all Environmental Laws, keep all necessary permits, approvals, certificates, licenses and other authorizations relating to environmental matters in effect and remain in compliance therewith, and handle all Hazardous Materials in compliance with all applicable Environmental Laws, except where noncompliance with any of the foregoing could not reasonably be expected to have a Material Adverse Effect. Section 6.14 Membership The Borrower shall cause ITG and each other Subsidiary which is a registered broker-dealer with the Securities and Exchange Commission or other applicable Governmental Authority to maintain such registration in full force and effect and maintain its membership in good standing in such organizations as are necessary to enable it to engage in the securities business and take all action necessary to comply in all material respects with the rules and regulations in effect from time to time of such organizations and each other Person or Governmental Authority to which it is subject, except in any case to the extent that the failure to do so is not reasonably expected to result in a Material Adverse Effect. -31- ARTICLE 7. NEGATIVE COVENANTS Until the Commitment have expired or been terminated and the principal of and interest on each Loan and all fees and other amounts payable under the Loan Documents shall have been paid in full, the Borrower covenants and agrees with the Lender that: Section 7.01 Indebtedness (a) The Borrower will not, and will not permit any Subsidiary to, create, incur, assume or permit to exist any Indebtedness, except: (i) Indebtedness under the Loan Documents; (ii) Indebtedness existing on the date hereof and set forth in Schedule 7.01, but not any extensions, renewals or replacements of any such Indebtedness; (iii) Indebtedness of the Borrower or any Subsidiary incurred to finance the acquisition, construction or improvement of any fixed or capital assets, including Capital Lease Obligations and any Indebtedness assumed in connection with the acquisition of any such assets or secured by a Lien on any such assets prior to the acquisition thereof, and extensions, renewals and replacements of any such Indebtedness that do not increase the outstanding principal amount thereof, provided that (A) such Indebtedness is incurred prior to or within 90 days after such acquisition or the completion of such construction or improvement and (B) the aggregate principal amount of Indebtedness permitted by this clause (iii) shall not exceed $1,000,000 at any time outstanding; (iv) Indebtedness of any Person that becomes a Subsidiary (other than a subsidiary of ITG) after the date hereof, provided that (A) such Indebtedness exists at the time such Person becomes a Subsidiary and is not created in contemplation of or in connection with such Person becoming a Subsidiary and (B) the aggregate principal amount of Indebtedness permitted by this clause (iv) shall not exceed $1,000,000 at any time outstanding; (v) Indebtedness of the Borrower or any of its Subsidiaries in respect of Street Loans, repurchase agreements, reverse repurchase agreements, securities loan agreements and other similar obligations incurred in the ordinary course of business; (vi) other unsecured Indebtedness of the Borrower in an aggregate principal amount not to exceed $1,000,000 at any time outstanding; and (vii) Indebtedness of Jefferies Group to be assumed by JEFCO pursuant to the Initial Transaction Documents with respect to which the consent of a third party is necessary for such assumption, which consent has not been received, provided that such Indebtedness shall not exceed (x) $5,000,000 from and after the effective date of the merger referred to in the definition of Initial Transactions until the first anniversary thereof, (y) $3,330,000 from and after such first anniversary until the second anniversary thereof and (z) $1,670,000 from and after such second anniversary until the third anniversary thereof, provided -32- that the Borrower's liabilities in respect of such Indebtedness may exceed the foregoing amounts to the extent that the Borrower shall have received a letter of credit issued for the benefit of the Borrower by one or more nationally recognized financial institutions in an aggregate undrawn face amount not less than the amount of such excess. (b) The Borrower will not, and it will not permit any Subsidiary to, (i) issue any preferred equity securities or (ii) be or become liable in respect of any obligation (contingent or otherwise) to purchase, redeem, retire, acquire or make any other payment in respect of any shares of equity securities of the Borrower or any Subsidiary or any option, warrant or other right to acquire any such shares of equity securities, except as permitted under Section 7.08. Section 7.02 Liens The Borrower will not, and will not permit any Subsidiary to, create, incur, assume or permit to exist any Lien on any property or asset now owned or hereafter acquired by it, or assign or sell any income or revenues (including accounts receivable) or rights in respect of any thereof, except: (a) Liens created under the Loan Documents; (b) Permitted Encumbrances; (c) any Lien on any property or asset of the Borrower or any Subsidiary existing on the date hereof and set forth in Schedule 7.02, provided that (i) such Lien shall not apply to any other property or asset of the Borrower or any Subsidiary and (ii) such Lien shall secure only those obligations which it secures on the date hereof and any extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof; (d) any Lien existing on any property or asset prior to the acquisition thereof by the Borrower or any Subsidiary or existing on any property or asset of any Person that becomes a Subsidiary after the date hereof prior to the time such Person becomes a Subsidiary, provided that (i) such Lien is not created in contemplation of or in connection with such acquisition or such Person becoming a Subsidiary, as applicable, (ii) such Lien shall not apply to any other property or assets of the Borrower or any Subsidiary and (iii) such Lien shall secure only those obligations that it secures on the date of such acquisition or the date such Person becomes a Subsidiary, as applicable, and any extensions, renewals and replacements thereof that do not increase the outstanding principal amount thereof; (e) Liens on fixed or capital assets acquired, constructed or improved by the Borrower or any Subsidiary, provided that (i) such security interests secure Indebtedness permitted by clause (iii) of Section 7.01, (ii) such security interests and the Indebtedness secured thereby are incurred prior to or within 90 days after such acquisition or the completion of such construction or improvement, (iii) the Indebtedness secured thereby does not exceed the cost of acquiring, constructing or improving such fixed or capital assets and (iv) such security interests shall not apply to any other property or assets of the Borrower or any Subsidiary; -33- (f) Liens in respect of obligations to repurchase securities, repurchase agreements, reverse repurchase agreements, securities loan agreements, Liens securing Street Loans and other Liens securing short-term obligations, in each case incurred in the ordinary course of business of the ITG; (g) Liens arising solely by virtue of any statutory or common law provision relating to banker's liens, rights of set-off or similar rights and remedies as to deposit accounts or other funds maintained with a creditor depository institution; (h) leases with respect to the assets or properties of the Borrower or any Subsidiary; (i) Liens evidenced by Uniform Commercial Code financing statements regarding operating and equipment leases permitted by this Agreement; (j) Liens solely in favor of the Borrower or any Subsidiary; (k) Liens securing obligations under Hedge Agreements with the Lender; and (l) Liens in respect of purchase options, calls and similar rights of third parties granted by ITG in the ordinary course of business where ITG owns or has purchased for future settlement the underlying securities. Section 7.03 Fundamental Changes (a) The Borrower will not, and will not permit any Subsidiary to, merge into or consolidate with any other Person, or permit any other Person to merge into or consolidate with it, or sell, transfer, lease or otherwise dispose of (in one transaction or in a series of transactions) all or substantially all of its assets, or all or substantially all of the equity securities of any of the Subsidiaries (in each case, whether now owned or hereafter acquired), or liquidate or dissolve, except that, if at the time thereof and immediately after giving effect thereto, no Default shall have occurred and be continuing: (i) any Subsidiary may merge into the Borrower in a transaction in which the Borrower is the surviving entity (ii) any Subsidiary may merge into any other Subsidiary provided that if any such Subsidiary is a direct wholly-owned Domestic Subsidiary, such direct wholly-owned Domestic Subsidiary shall be the survivor; (iii) any Subsidiary (other than ITG or any subsidiary of ITG) may merge with any Person in a transaction that is not permitted by clause (i) or (ii) of this Section 7.03(a), provided that such merger is permitted by Section 7.04 or 7.05, as applicable; (iv) any Subsidiary may sell, transfer, lease or otherwise dispose of its assets to (A) the Borrower or (B) any other Subsidiary provided that if any such -34- Subsidiary is a direct wholly-owned Domestic Subsidiary, such direct wholly-owned Domestic Subsidiary shall be the buyer, transferee or lessee, as applicable; (v) the Borrower or any Subsidiary (other than ITG or any subsidiary of ITG) may sell, transfer, lease or otherwise dispose of its assets in a transaction that is not permitted by clause (iv) of this Section 7.03(a), provided that such sale, transfer, lease or other disposition is also permitted by Section 7.05; and (vi) any Subsidiary (other than ITG) may liquidate or dissolve if the Borrower determines in good faith that such liquidation or dissolution is in the best interest of the Borrower and is not materially disadvantageous to the Lender. (b) The Borrower will not, and will not permit any of the Subsidiaries to, engage to any material extent in any business other than businesses of the type conducted by the Borrower and the Subsidiaries on the date of execution of this Agreement and businesses directly related thereto. Section 7.04 Investments, Loans, Advances, Guarantees and Acquisitions The Borrower will not, and will not permit any of the Subsidiaries to, purchase, hold or acquire (including pursuant to any merger) any capital stock, evidences of indebtedness or other securities (including any option, warrant or other right to acquire any of the foregoing) of, make or permit to exist any loans or advances to, Guarantee any obligations of, or make or permit to exist any investment or any other interest in, any other Person, or purchase or otherwise acquire (in one transaction or a series of transactions (including pursuant to any merger)) any assets of any other Person constituting a business unit, except: (a) Permitted Investments; (b) investments and Guarantees (other than Permitted Investments) existing on the date hereof and set forth in Schedule 7.04; (c) investments made by the Borrower in the equity securities of any Subsidiary and made by any Subsidiary in the equity securities of any other Subsidiary, provided that any such equity securities owned by the Borrower shall be pledged pursuant to the Security Agreement; (d) loans or advances made by the Borrower or any Subsidiary to any Domestic Subsidiary; (e) acquisitions made by the Borrower from any Subsidiary and made by any Subsidiary from the Borrower or any other Subsidiary; (f) investments in the entities set forth on Schedule 7.04(f) in an amount not to exceed $10,000,000 in any fiscal year; -35- (g) loans made by the Borrower to Affiliates and employees to enable such Affiliates and employees to pay the exercise price, and pay related income tax withholding obligations in respect of, stock options in the Borrower that expire April 30, 1999; and (h) Guarantees constituting Indebtedness permitted by Section 7.01(a)(vii). Section 7.05 Asset Sales The Borrower will not, and will not permit any of the Subsidiaries to, sell, transfer, lease or otherwise dispose (including pursuant to a merger) of any asset, including any equity securities, nor will the Borrower permit any of the Subsidiaries to issue any additional shares of its equity securities, except: (a) sales, transfers, leases and other dispositions of inventory, used or surplus equipment, in each case in the ordinary course of business; (b) sales, transfers, leases and other dispositions made by the Borrower to any Subsidiary and made by any Subsidiary to the Borrower or any other Subsidiary; (c) transactions permitted by Section 7.04; and (d) if at the time thereof and immediately after giving effect thereto no Default shall have occurred and be continuing, other sales, transfers, leases and other dispositions of assets, provided that all sales, transfers, leases and other dispositions permitted by this clause (c) shall be made for fair value and solely for cash consideration. Section 7.06 Sale and Lease-Back Transactions The Borrower will not, and will not permit any of the Subsidiaries to, enter into any arrangement, directly or indirectly, with any Person whereby it shall sell or transfer any property, real or personal, used or useful in its business, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property that it intends to use for substantially the same purpose or purposes as the property being sold or transferred. Section 7.07 Hedging Agreements The Borrower will not, and will not permit any of the Subsidiaries to, enter into any Hedging Agreement, other than Hedging Agreements entered into in the ordinary course of business to hedge or mitigate risks to which the Borrower or any Subsidiary is exposed in the conduct of its business or the management of its liabilities. Section 7.08 Restricted Payments The Borrower will not, and will not permit any of the Subsidiaries to, declare or make, or agree to pay for or make, directly or indirectly, any Restricted Payment, except that (a) the Borrower may declare and pay dividends with respect to its equity securities payable solely in additional shares of its equity securities, (b) any Subsidiary may declare and pay dividends -36- with respect to its equity securities to the Borrower or any Subsidiary, (c) the Borrower and ITG may make the Initial Restricted Payment and (d) so long as immediately before after giving effect thereto (i) no Default would exist and be continuing and (ii) Consolidated Shareholders' Equity is greater than or equal to $80,000,000, the Borrower may declare and pay dividends in an amount not in excess of 25% of the net income of the Borrower and the Subsidiaries determined on a consolidated basis in accordance with GAAP for the immediately preceding four fiscal quarters. Section 7.09 Transactions with Affiliates The Borrower will not, and will not permit any of the Subsidiaries to, sell, transfer, lease or otherwise dispose (including pursuant to a merger) any property or assets to, or purchase, lease or otherwise acquire (including pursuant to a merger) any property or assets from, or otherwise engage in any other transactions with, any of its Affiliates, except in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower or such Subsidiary than could be obtained on an arms-length basis from unrelated third parties; provided, however, that the foregoing limitations shall not apply to (i) the Initial Transactions, (ii) any transaction permitted by Section 7.08, and (iii) loans made by the Borrower to Affiliates or employees to enable such Affiliates or employees to pay the exercise price, and pay related income tax withholding obligations in respect of, stock options in the Borrower that expire April 30, 1999. Section 7.10 Restrictive Agreements The Borrower will not, and will not permit any of the Subsidiaries to, directly or indirectly, enter into, incur or permit to exist any agreement or other arrangement that prohibits, restricts or imposes any condition upon (a) the ability of the Borrower or any Subsidiary to create, incur or permit to exist any Lien upon any of its property or assets or (b) the ability of any Subsidiary to pay dividends or other distributions with respect to any shares of its equity securities or to make or repay loans or advances to the Borrower or any other Subsidiary or to Guarantee Indebtedness of the Borrower or any other Subsidiary, provided that (i) the foregoing shall not apply to restrictions and conditions imposed by law or by this Agreement, (ii) the foregoing shall not apply to restrictions and conditions existing on the date hereof identified on Schedule 7.10 (but shall apply to any extension or renewal of, or any amendment or modification expanding the scope of, any such restriction or condition), (iii) the foregoing shall not apply to customary restrictions and conditions contained in agreements relating to the sale of a Subsidiary pending such sale, provided that such restrictions and conditions apply only to the Subsidiary that is to be sold and such sale is permitted hereunder, (iv) clause (a) of this Section shall not apply to restrictions or conditions imposed by any agreement relating to secured Indebtedness permitted by this Agreement if such restrictions or conditions apply only to the property or assets securing such Indebtedness and (v) clause (a) of this Section shall not apply to customary provisions in leases restricting the assignment thereof. -37- Section 7.11 Concerning the POSIT License Agreement The Borrower will not, and will not permit any Subsidiary to, amend, modify or waive any of its rights under the POSIT License Agreement other than amendments, modifications or waivers that would not reasonably be expected to adversely affect the Lender. Section 7.12 Leverage Ratio The Borrower will not permit the Leverage Ratio to be greater than 2.50:1.00. Section 7.13 Net Capital The Borrower shall not at any time permit the Net Capital before total haircuts of ITG (calculated in accordance with Rule 15c3-1) to be less than the sum of $7,500,000 plus the Credit Exposure at such time. Section 7.14 Consolidated Shareholders' Equity The Borrower will not permit Consolidated Shareholders' Equity to be less than the sum of $60,000,000 plus 50% of the net income (if positive) of the Borrower and the Subsidiaries on a consolidated basis in accordance with GAAP for each fiscal quarter ending after the date hereof, measured on the date thereafter on which financial statements for such fiscal quarter are delivered to the Lender. Section 7.15 Capital Expenditures The Borrower will not permit Capital Expenditures made or obligated to be made by the Borrower and the Subsidiaries on a consolidated basis to be greater than $10,000,000 in any fiscal year. Section 7.16 Initial Transactions Notwithstanding anything to the contrary in any Loan Document, nothing contained in this Article shall prevent the consummation of any of the Initial Transactions. ARTICLE 8. EVENTS OF DEFAULT If any of the following events ("Events of Default") shall occur: (a) the Borrower shall fail to pay any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or otherwise; (b) the Borrower shall fail to pay any interest on any Loan or any fee, commission or any other amount (other than an amount referred to in clause (a) of this Article) -38- payable under any Loan Document, when and as the same shall become due and payable, and such failure shall continue unremedied for a period of three Business Days; (c) any representation or warranty made or deemed made by or on behalf of the Borrower or any other Subsidiary in or in connection with any Loan Document or any amendment or modification hereof or waiver thereunder, or in any report, certificate, financial statement or other document furnished pursuant to or in connection with any Loan Document or any amendment or modification hereof or waiver thereunder, shall prove to have been incorrect in any material respect when made or deemed made; (d) the Borrower shall fail to observe or perform any covenant, condition or agreement contained in Section 6.03 (with respect to the Borrower's or ITG's existence) or in Article 7, or the Borrower shall fail to observe or perform any covenant, condition or agreement contained in Section 5(i) of the Security Agreement. (e) the Borrower shall fail to observe or perform any covenant, condition or agreement contained in any Loan Document to which it is a party (other than those specified in clause (a), (b) or (d) of this Article), and such failure shall continue unremedied for a period of 30 days after the Borrower shall have obtained knowledge thereof; (f) the Borrower or any Subsidiary shall fail to make any payment (whether of principal or interest and regardless of amount) in respect of any Material Indebtedness, when and as the same shall become due and payable (after giving effect to any applicable grace period); (g) any event or condition occurs that results in any Material Indebtedness becoming due prior to its scheduled maturity or that enables or permits (with or without the giving of notice, the lapse of time or both) the holder or holders of any Material Indebtedness or any trustee or agent on its or their behalf to cause any Material Indebtedness to become due, or to require the prepayment, repurchase, redemption or defeasance thereof, prior to its scheduled maturity (in each case after giving effect to any applicable grace period), provided that this clause (g) shall not apply to secured Indebtedness that becomes due solely as a result of the voluntary sale or transfer of the property or assets securing such Indebtedness; (h) an involuntary proceeding shall be commenced or an involuntary petition shall be filed seeking (i) liquidation, reorganization or other relief in respect of the Borrower or any Subsidiary or its debts, or of a substantial part of its assets, under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect or (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Subsidiary or for a substantial part of its assets, and, in any such case, such proceeding or petition shall continue undismissed for 45 days or an order or decree approving or ordering any of the foregoing shall be entered; (i) the Borrower or any Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking liquidation, reorganization or other relief under any Federal, state or foreign bankruptcy, insolvency, receivership or similar law now or hereafter in effect, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any -39- proceeding or petition described in clause (h) of this Article, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Borrower or any Subsidiary or for a substantial part of its assets, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors or (vi) take any action for the purpose of effecting any of the foregoing; (j) the Borrower or any Subsidiary shall become unable, admit in writing its inability or fail generally to pay its debts as they become due; (k) one or more judgments for the payment of money in an aggregate amount (to the extent not paid or fully covered by insurance) in excess of $5,000,000 shall be rendered against the Borrower or any Subsidiary or any combination thereof and the same shall remain undischarged for a period of 30 consecutive days during which execution shall not be effectively stayed or bonded, or any action shall be legally taken by a judgment creditor to attach or levy upon any assets of the Borrower or any Subsidiary to enforce any such judgment; (l) an ERISA Event shall have occurred that, when taken together with all other ERISA Events that have occurred, could reasonably be expected to result in a Material Adverse Effect; (m) any Loan Document shall cease, for any reason, to be in full force and effect, or the Borrower shall so assert in writing or shall disavow any of its obligations thereunder; (n) any Lien purported to be created under any Security Document shall cease to be, or shall be asserted by the Borrower not to be, a valid and perfected Lien on any Collateral, with the priority required by the applicable Security Document, except (i) as a result of the sale or other disposition of the applicable Collateral in a transaction permitted under the Loan Documents or (ii) as a result of the Lender's failure to maintain possession of any stock certificates delivered to it under the Security Agreement; or (o) the POSIT License Agreement shall have been terminated or any event shall have occurred (after any applicable grace period), the result of which gives the POSIT Joint Venture the right to do so as the result of a breach; or (p) a Change in Control shall occur; then, and in every such event (other than an event described in clause (h) or (i) of this Article), and at any time thereafter during the continuance of such event, the Lender may and by notice to the Borrower, take either or both of the following actions, at the same or different times: (i) terminate the Commitment, and thereupon the Commitment shall terminate immediately and (ii) declare the Loans then outstanding to be due and payable in whole (or in part, in which case any principal not so declared to be due and payable may thereafter be declared to be due and payable), and thereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and all fees and other obligations of the Borrower accrued under the -40- Loan Documents, shall become due and payable immediately, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower; and in case of any event described in clause (h) or (i) of this Article, the Commitment shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and all fees and other obligations of the Borrower accrued under the Loan Documents, shall automatically become due and payable, without presentment, demand, protest or other notice of any kind, all of which are hereby waived by the Borrower. ARTICLE 9. MISCELLANEOUS Section 9.01 Notices Except in the case of notices and other communications expressly permitted to be given by telephone, all notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed by certified or registered mail or sent by telecopy, as follows: (a) if to the Borrower, to it at 380 Madison Avenue, New York, NY 10017, Attention of John R. MacDonald, Senior Vice President and Chief Financial Officer (Telephone No. (212) 444-6252; Telecopy No. (212) 444-6490); (b) if to the Lender to it at One Wall Street, New York, New York 10286, Attention of Mark T. Rogers, Vice President (Telephone No. (212) 635-6827; Telecopy No. (212) 809-9566). Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt. Section 9.02 Waivers; Amendments (a) No failure or delay by the Lender in exercising any right or power under any Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Lender under the Loan Documents are cumulative and are not exclusive of any rights or remedies that they would otherwise have. No waiver of any provision of any Loan Document or consent to any departure by the Borrower therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) of this Section, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. Without limiting the generality of the foregoing, the making of a Loan shall not be construed as a waiver of any Default, regardless of whether the Lender may have had notice or knowledge of such Default at the time. -41- (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrower and the Lender. Section 9.03 Expenses; Indemnity; Damage Waiver (a) The Borrower shall pay (i) all reasonable out-of-pocket expenses incurred by the Lender and its Affiliates, including the reasonable fees, charges and disbursements of counsel for the Lender, in connection with the preparation and administration of this Agreement or any amendments, modifications or waivers of the provisions of any Loan Document (whether or not the transactions contemplated thereby shall be consummated) and (ii) all reasonable out-of-pocket expenses incurred by the Lender, including the reasonable fees, charges and disbursements of any counsel for the Lender, in connection with the enforcement or protection of its rights in connection with the Loan Documents, including its rights under this Section, or in connection with the Loans made hereunder, including all such out-of-pocket expenses incurred during any workout, restructuring or negotiations in respect of such Loans. (b) The Borrower shall indemnify the Lender and each Related Party (each such Person being called an "Indemnitee") against, and hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including the reasonable fees, charges and disbursements of any counsel for any. Indemnitee incurred by or asserted against any Indemnitee arising out of, in connection with, or as a result of (i) the execution or delivery of any Loan Document or any agreement or instrument contemplated thereby, the performance by the parties to the Loan Documents of their respective obligations thereunder or the consummation of the Transactions or any other transactions contemplated thereby, (ii) any Loan or the use of the proceeds thereof, (iii) any actual or alleged presence or release of Hazardous Materials on or from any property owned or operated by the Borrower or any of the Subsidiaries, or any Environmental Liability related in any way to the Borrower or any of the Subsidiaries or (iv) any actual or prospective claim, litigation, investigation or proceeding relating to any of the foregoing, whether based on contract, tort or any other theory and regardless of whether any Indemnitee is a party thereto, provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a court of competent jurisdiction by final and nonappealable judgment to have resulted from the gross negligence or willful misconduct of such Indemnitee. (c) To the extent permitted by applicable law, the Borrower shall not assert, and hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with, or as a result of, any Loan Document or any agreement, instrument or other document contemplated thereby, the Transactions or any Loan or the use of the proceeds thereof. (d) All amounts due under this Section shall be payable promptly but in no event later than 30 days after written demand therefor, provided that the Borrower shall have received a breakdown of such amounts in reasonable detail if it so requests. -42- Section 9.04 Successors and Assigns (a) The provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns permitted hereby, except that the Borrower may not assign or otherwise transfer any of its rights or obligations hereunder without the prior written consent of the Lender (and any attempted assignment or transfer by the Borrower without such consent shall be null and void). Nothing in this Agreement, expressed or implied, shall be construed to confer upon any Person (other than the parties hereto, their respective successors and assigns permitted hereby and, to the extent expressly contemplated hereby, the Related Parties) any legal or equitable right, remedy or claim under or by reason of any Loan Document. (b) The Lender may, with the consent of the Borrower (such consent not to be unreasonably withheld or delayed or to be required during the continuance of an Event of Default), assign to one or more assignees all or a portion of its rights and obligations under this Agreement (including all or a portion of the Commitment and the Loans at the time owing to it); provided that (i) any such assignment is an aggregate amount of not less than $3,000,000, and (ii) The Bank of New York continues to hold at all times not less than 51% of the Credit Exposure. The Lender shall, to the extent of the interest assigned, be released from its obligations under the Loan Documents (and, in the case of an assignment covering all of the Lender's rights and obligations under the Loan Documents, the Lender shall cease to be a party hereto but shall continue to be entitled to the benefits of Sections 3.03, 3.04 and 9.03). The Lender agrees that it will not assign any such rights or obligations to a Plan. (c) The Lender may, without the consent of the Borrower or the Lender, sell participations to one or more banks or other entities (other than a Plan) (each such bank or other entity being called a "Participant") in all or a portion of the Lender's rights and obligations under the Loan Documents (including all or a portion of the Commitment and the Loans owing to it), provided that (i) the Lender's obligations under the Loan Documents shall remain unchanged, (ii) the Lender shall remain solely responsible to the other parties hereto for the performance of such obligations and (iii) the Borrower and the Lender shall continue to deal solely and directly with the Lender in connection with the Lender's rights and obligations under the Loan Documents. Any agreement or instrument pursuant to which the Lender sells such a participation shall provide that the Lender shall retain the sole right to enforce the Loan Documents and to approve any amendment, modification or waiver of any provision of any Loan Documents, provided that such agreement or instrument may provide that the Lender will not, without the consent of the Participant, agree to any amendment, modification or waiver that affects such Participant and which would reduce the principal amount of any Loan, or reduce the rate of interest thereon, or reduce any fees or other amounts payable under the Loan Documents. Subject to paragraph (d) of this Section, the Borrower agrees that each Participant shall be entitled to the benefits of Sections 3.03 and 3.04 to the same extent as if it were the Lender and had acquired its interest by assignment pursuant to paragraph (b) of this Section. To the extent permitted by law, each Participant also shall be entitled to the benefits of Section 9.08 as though it were the Lender, provided that such Participant agrees that if by exercising any right of setoff or counterclaim or otherwise, it obtains payment in respect of its participation resulting in it receiving payment of a -43- greater proportion of the aggregate amount of its participation than the proportion it is entitled to receive, then such Participant shall purchase (for cash at face value) an additional participation in the Loans of the Lender to the extent necessary so that the benefit of all such payments shall be shared by the Lender and such Participant in accordance with the terms of the agreement pursuant to which it purchased its participations provided further that (i) if any such participations are purchased pursuant to this sentence and all or any portion of the payment giving rise thereto is recovered, such participations shall be rescinded and the purchase price restored to the extent of such recovery, without interest, and (ii) the provisions of this sentence shall not be construed to apply to any payment made by the Borrower pursuant to and in accordance with the express terms of this Agreement or any payment obtained by the Lender as consideration for the assignment of or sale of a participation in any of its Loans. The Borrower consents to the foregoing and agrees, to the extent it may effectively do so under applicable law, that in acquiring a participation pursuant to the foregoing arrangements, the Participant may exercise against the Borrower rights of setoff and counterclaim with respect to such participation as fully as if the Participant were a direct creditor of the Borrower in the amount of such participation. A Participant shall not be entitled to receive any greater payment under Section 3.03 or 3.04 than the Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower's prior written consent. A Participant that is organized under the laws of a jurisdiction other than United States of America, any State thereof or the District of Columbia shall not be entitled to the benefits of Section 3.04 unless the Borrower is notified of the participation sold to such Participant and, if such Participant is entitled to an exemption from or reduction of withholding tax under the law of the United States of America, such Participant agrees to deliver to the Borrower (with a copy to the Lender), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law or reasonably requested by the Borrower as will permit such payments to be made without withholding or at a reduced rate. (d) The Lender may at any time pledge or assign a security interest in all or any portion of its rights under the Loan Documents to secure obligations of the Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest, provided that no such pledge or assignment of a security interest shall release the Lender from any of its obligations under the Loan Documents or substitute any such pledgee or assignee for the Lender as a party hereto. Section 9.05 Survival All covenants, agreements, representations and warranties made by the Borrower herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement or any other Loan Document shall be considered to have been relied upon by the other parties hereto and shall survive the execution and delivery of any Loan Document and the making of any Loan, regardless of any investigation made by any such other party or on its behalf and notwithstanding that the Lender may have had notice or knowledge of any Default or incorrect representation or warranty at the time any credit is extended hereunder, and shall continue in full force and effect as long as the principal of or any accrued interest on -44- any Loan or any fee or any other amount payable under the Loan Documents is outstanding and unpaid and so long as the Commitment have not expired or terminated. The provisions of Sections 3.03, 3.04 and 9.03 shall survive and remain in full force and effect regardless of the consummation of the transactions contemplated hereby, the repayment of the Loans and the termination of the Commitment or the termination of this Agreement or any provision hereof. Section 9.06 Counterparts; Integration This Agreement may be executed in counterparts (and by different parties hereto on different counterparts), each of which shall constitute an original, but all of which, when taken together, shall constitute but one contract. This Agreement constitutes the entire contract among the parties relating to the subject matter hereof and supersedes any and all previous agreements and understandings, oral or written, relating to the subject matter hereof. Section 9.07 Severability In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby (it being understood that the invalidity of a particular provision in a particular jurisdiction shall not in and of itself affect the validity of such provision in any other jurisdiction). The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. Section 9.08 Right of Setoff If an Event of Default shall have occurred and be continuing, the Lender and its Affiliates are hereby authorized at any time and from time to time, to the fullest extent permitted by applicable law, to setoff and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other obligations at any time owing by it to or for the credit or the account of the Borrower against any of and all the obligations of the Borrower now or hereafter existing under this Agreement held by it, irrespective of whether or not it shall have made any demand under this Agreement and although such obligations may be unmatured. The rights of the Lender and its Affiliates under this Section are in addition to other rights and remedies (including other rights of setoff) that it may have. Section 9.09 Governing Law; Jurisdiction; Consent to Service of Process (a) This Agreement shall be governed by, and construed in accordance with, the laws of the State of New York. (b) The Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York City, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or the other Loan -45- Documents, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that, to the extent permitted by applicable law, all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by applicable law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement shall affect any right that the Lender may otherwise have to bring any action or proceeding relating to this Agreement or the other Loan Documents against the Borrower, or any of its property, in the courts of any jurisdiction. (c) The Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection that it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or the other Loan Documents in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. Section 9.10 WAIVER OF JURY TRIAL EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT. EACH PARTY HERETO (A) CERTIFIES THAT NO REPRESENTATIVE, AGENT OR ATTORNEY OF ANY OTHER PARTY HAS REPRESENTED, EXPRESSLY OR OTHERWISE, THAT SUCH OTHER PARTY WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THE FOREGOING WAIVER AND (B) ACKNOWLEDGES THAT IT AND THE OTHER PARTIES HERETO HAVE BEEN INDUCED TO ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION. Section 9.11 Headings Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and shall not affect the construction of, or be taken into consideration in interpreting, this Agreement. Section 9.12 Interest Rate Limitation Notwithstanding anything herein to the contrary, if at any time the interest rate applicable to any Loan, together with all fees, charges and other amounts that are treated as -46- interest on such Loan under applicable law (collectively the "charges"), shall exceed the maximum lawful rate (the "maximum rate") that may be contracted for, charged, taken, received or reserved by the Lender in accordance with applicable law, the rate of interest payable in respect of such Loan hereunder, together with all of the charges payable in respect thereof, shall be limited to the maximum rate and, to the extent lawful, the interest and the charges that would have been payable in respect of such Loan but were not payable as a result of the operation of this Section shall be cumulated, and the interest and the charges payable to the Lender in respect of other Loans or periods shall be increased (but not above the maximum rate therefor) until such cumulated amount, together with interest thereon at the Federal Funds Rate to the date of repayment, shall have been received by the Lender. -47- IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. INVESTMENT TECHNOLOGY GROUP, INC. By: /s/ John R. MacDonald ----------------------------- Name: John R. MacDonald Title: Chief Financial Officer THE BANK OF NEW YORK By: /s/ Mark T. Rogers ----------------------------- Name: Mark T. Rogers Title: Vice President EX-10.4-6 12 EXHIBIT 10.4-6 Exhibit 10.4.6 INVESTMENT TECHNOLOGY GROUP, INC. AMENDED AND RESTATED 1998 STOCK UNIT AWARD PROGRAM 1. Purpose This 1998 Stock Unit Award Program (the "Program") is implemented under the 1994 Stock Option and Long-Term Incentive Plan, as amended and restated (the "Plan"), of Investment Technology Group, Inc. (the "Company") in order to provide an additional incentive to selected members of senior management and key employees to increase the success of the Company, by substituting stock units for a portion of the cash compensation payable to such persons on a mandatory basis, which stock units represent an equity interest in the Company to be acquired and held under the Program on a long-term, tax-deferred basis, and otherwise to promote the purposes of the Plan. 2. Definitions Capitalized terms used in the Program but not defined herein shall have the same meanings as defined in the Plan. In addition to such terms and the terms defined in Section 1, the following terms used in the Program shall have the meanings set forth below: 2.1 "Account" means the account established for each Participant pursuant to Section 7(g) hereof. 2.2 "Actual Reduction Amount" means the amount by which a given quarterly or year-end bonus payment to a Participant is in fact reduced under Section 6. 2.3 "Administrator" shall be the person or committee appointed by the Committee to perform ministerial functions under the Program and to exercise other authority delegated by the Committee. 2.4 "Assigned Reduction Amount" means an amount determined by the Administrator in accordance with Section 6(b), in the case of an individual Participant, which shall be used under Section 7(a) to determine the number of Stock Units to be credited to the Participant's Account in respect of a given calendar quarter. The assigned Reduction Amount does not accumulate from one quarter to the next. 2.5 "Current Participant" means a Participant who, during the current year, is subject to mandatory payment of a portion of compensation by grant of Stock Units under the Program. -1- 2.6 "Participant" means an eligible person who is granted Stock Units under the Program, which Stock Units have not yet been settled. 2.7 "Stock Unit" means an award, granted pursuant to Section 6.5 and 6.6 of the Plan, representing a generally nontransferable right to receive one share of Common Stock at a specified future date together with a right to Dividend Equivalents as specified in Section 7(d) hereof and subject to the terms and conditions of the Plan and the Program. Stock Units are bookkeeping units, and do not represent ownership of Common Stock or any other equity security. 2.8 "Termination of Employment" means termination of a Participant's employment by the Company or a subsidiary for any reason, including due to death or disability, immediately after which event the Participant is not employed by the Company or any subsidiary. 3. Administration (a) AUTHORITY. The Program shall be established and administered by the Committee, which shall have all authority under the Program as it has under the Plan; PROVIDED, HOWEVER, that terms of the grant of Stock Units hereunder may not be inconsistent with the express terms set forth in the Program. Ministerial functions under the Program and other authority specifically delegated by the Committee shall be performed or exercised by and at the direction of the Administrator. (b) MANNER OF EXERCISE OF AUTHORITY. Any action of the Committee or its delegatee with respect to the Program shall be final, conclusive, and binding on all persons, including the Company, subsidiaries, participants granted Stock Units which have not yet been settled, and any person claiming any rights under the Program from or through any Participant, except that the Committee may take action within a reasonable time after any such action superseding or overruling a prior action. (c) LIMITATION OF LIABILITY. Each member of the Committee or delegatee shall be entitled to, in good faith, rely or act upon any report or other information furnished to him by any officer or other employee of the Company or any subsidiary or any agent or professional assisting in the administration of the Plan, such member or person shall not be personally liable for any action, determination, or interpretation taken or made in good faith with respect to the Program, and such member or person shall, to the extent permitted by law, be fully indemnified and protected by the Company with respect to any such action, determination, or interpretation. (d) STATUS AS SUBPLAN UNDER THE PLAN. The Program constitutes a subplan implemented under the Plan, to be administered in accordance with the terms of the Plan. Accordingly, all of the terms and conditions of the Plan are hereby incorporated by reference, and, if any provision of the Program or a statement or document relating to Stock Units granted hereunder conflicts with a provision of the Plan, the provision of the Plan shall govern. -2- 4. Stock Subject to the Program Shares of Common Stock delivered upon settlement of Stock Units under the Program shall be shares reserved and available under the Plan. Accordingly, Stock Units may be granted under the Program if sufficient shares are not then reserved and available under the Plan, and the number of shares delivered in settlement of Stock Units hereunder shall be counted against the shares reserved and available under the Plan. Awards may be granted under the Plan even though the effect of such grants will be to reduce the number of shares remaining available for grants hereunder. Stock Units granted under the Program in place of compensation under the Plan resulting from a 162(m) Award (as defined in the Plan) or in place of compensation under the Company's Pay-for-Performance Incentive Plan shall be subject to annual per-person limitations applicable to such compensation under such plan. 5. Eligibility and Selection The Committee may select any person who is eligible to be granted an Award under the Plan to be granted Stock Units under the Program as a mandatory portion of compensation otherwise payable to the Participant. A Participant who is selected to be a Current Participant in one year will not necessarily be selected to be a Current Participant in a subsequent year. 6. Mandatory Reduction of Bonus Compensation (a) AMOUNT OF MANDATORY REDUCTION. A Current Participant's cash compensation shall be automatically reduced by an amount determined in accordance with a schedule adopted by the Committee and applicable to compensation payable in the specified year; PROVIDED, HOWEVER, that the Committee may adjust the schedule applicable to an individual Current Participant. For 1998, the initial year under the Program, unless adjusted by the Committee in an individual case, the amount of total compensation payable to a Current Participant shall be reduced on a mandatory basis as follows: 5% of the first $100,000 of annual compensation; 10% of the next $100,000 of annual compensation; 15% of the next $400,000 of annual compensation; and 20% of annual compensation in excess of $600,000. The foregoing notwithstanding, in no event will the amount by which cash compensation is reduced exceed the amount of bonus payable to the Participant. For purposes of the Program, the amount by which cash compensation is reduced hereunder shall be calculated without regard to any reductions in compensation resulting from Participant's contributions under any Section 401(k), Section 125, pension plan, or other plan of the Company or a subsidiary, and such amount shall not be deemed a reduction in the Participant's compensation for purposes of any such Section 401(k), Section 125, pension plan, or other plan of the Company or a subsidiary. -4- (b) MANNER OF REDUCTION OF COMPENSATION. Amounts by which compensation is reduced under Section 6(a) will be subtracted from bonus amounts in respect of services during the year otherwise payable to the Current Participant at or following the end of the first three calendar quarters of such year and at or following the end of the year. The amount by which each bonus amount payable following the end of the first three calendar quarters will be reduced will be calculated based on a reasonable estimate of total compensation for the year, taking into account the amount by which compensation previously has been reduced for the year (i.e., in the case of a Participant employed since the beginning of the year and for whom estimated annual compensation has not varied during the year, by calculating an estimated aggregate amount by which compensation will be reduced for the year and reducing the quarterly bonus payment by one-fourth of such amount), and will be calculated at the time the year-end bonus amount otherwise becomes payable based on actual compensation for the year, taking into account the amount by which compensation previously has been reduced for the year (i.e., by calculating the actual amount by which compensation will be reduced for the year and reducing the year-end bonus payment by that amount less the amount by which compensation was reduced in previous quarters). The foregoing notwithstanding, the Administrator may determine in the case of any individual Participant, including a Participant who is not paid a bonus on a quarterly basis, the extent (if any) to which any bonus amounts other than the Participant's year-end bonus amount shall be reduced taking into account the terms of the Participant's compensation arrangement and the Participant's individual circumstances. In such cases, the Administrator may assign to the Participant an Assigned Reduction Amount for each calendar quarter, so that Stock Units will be automatically granted to such Participant under Section 7(a) at times and in amounts comparable to grants to other Participants, such that, on a full-year basis, the aggregate of the Participant's Assigned Reduction Amounts and any Actual Reduction Amounts used to determine the number of Stock Units credited to the Participant's Account under Section 7(a) for such year will equal the aggregate amount by which the Participant's full-year's compensation is to be reduced (after giving effect to adjustments under Section 7(b)). 7. Grant of Stock Units (a) AUTOMATIC GRANT OF STOCK UNITS. Each Participant shall be automatically granted Stock Units, as of the last day of each calendar quarter, in a number equal to the Participant's Actual Reduction Amount or Assigned Reduction Amount (as applicable) divided by the Fair Market Value of a share of Common Stock on the last day of such calendar quarter. In addition, each Participant shall be automatically granted Stock Units, as of the last day of each calendar quarter, in a number equal to 15% of the number of Stock Units granted under this Section 7(a) at that date. Stock Units shall be initially credited to the Participant's Account as of the date of grant (it being recognized, however, that the determination of the number of Stock Units granted and the posting of such transactions to the Account will occur after date of grant under this Section 7(a), based on the time at which quarterly bonus amounts are determined and the Actual Reduction Amount or Assigned Reduction Amount determined in accordance with Section 6 hereof). -5- (b) RISK OF FORFEITURE; CANCELLATION OF CERTAIN STOCK UNITS. Stock Units shall at all times be fully vested and non-forfeitable. The foregoing notwithstanding, if, at the end of a given year (upon calculation of year-end bonuses), the aggregate of the Participant's Actual Reduction Amounts and any Assigned Reduction Amounts used to determine the number of Stock Units credited under Section 7(a) for such year exceeds the amount by which the full-year's compensation should have been reduced under Section 6(a) (the "corrected full-year amount"), the Participant shall be paid in cash, without interest, the amount (if any) by which such Actual Reduction Amounts and Assigned Reduction Amounts exceeded such corrected full-year amount, and any Stock Units credited to the Participant under Section 7 as a result of such excess Actual Reduction Amounts and Assigned Reduction Amounts shall be cancelled. Unless otherwise determined by the Administrator, the Stock Units to be cancelled shall be cancelled from each of the four quarterly grants in the proportion the Actual Reduction Amounts and Assigned Reduction Amounts used in determining such quarterly grant bore to the aggregate of the Actual Reduction Amounts and Assigned Reduction Amounts used in determining all grants of Stock Units over the full year. (c) NONTRANSFERABILITY. Stock Units and all rights relating thereto shall not be transferable or assignable by a Participant, other than by will or the laws of descent and distribution, and shall not be pledged, hypothecated, or otherwise encumbered in any way or subject to execution, attachment, or similar process. (d) DIVIDEND EQUIVALENTS ON STOCK UNITS. Dividend Equivalents shall be credited on Stock Units as follows: (i) CASH AND NON-COMMON STOCK DIVIDENDS. If the Company declares and pays a dividend or distribution on Common Stock in the form of cash or property other than shares of Common Stock, then a number of additional Stock Units shall be credited to a Participant's Account as of the payment date for such dividend or distribution equal to (i) the number of Stock Units credited to the Account as of the record date for such dividend or distribution multiplied by (ii) the amount of cash plus the fair market value of any property other than shares actually paid as a dividend or distribution on each outstanding share of Common Stock at such payment date, divided by (iii) the Fair Market Value of a share of Common Stock at such payment date. (ii) COMMON STOCK DIVIDENDS AND SPLITS. If the Company declares and pays a dividend or distribution on Common Stock in the form of additional shares of Common Stock, or there occurs a forward split of Common Stock, then a number of additional Stock Units shall be credited to the Participant's Account as of the payment date for such dividend or distribution or forward split equal to (i) the number of Stock Units credited to the Account as of the record date for such dividend or distribution or split multiplied by (ii) the number of additional shares -6- of Common Stock actually paid as a dividend or distribution or issued in such split in respect of each outstanding share of Common Stock. (e) ADJUSTMENTS TO STOCK UNITS. The number of Stock Units credited to each Participant's Account shall be appropriately adjusted, in order to prevent dilution or enlargement of Participants' rights with respect to such Stock Units, to reflect any changes in the number of outstanding shares of Common Stock resulting from any event referred to in Section 5.5 of the Plan, taking into account any Stock Units credited to the Participant in connection with such event under Section 7(d). (f) FRACTIONAL SHARES. The number of Stock Units credited to a Participant's Account shall include fractional shares calculated to at least three decimal places, unless otherwise determined by the Committee. (g) ACCOUNTS AND STATEMENTS. The Administrator shall establish, or cause to be established, an Account for each Participant. An individual statement of each Participant's Account will be issued to each Participant not less frequently than annually. Such statements shall reflect the Stock Units credited to the Participant's Account, transactions therein during the period covered by the statement, and other information deemed relevant by the Administrator. Such statement may include information regarding other plans and compensatory arrangements for Directors. (h) CONSIDERATION FOR STOCK UNITS. Stock Units shall be granted for the general purposes set forth in Section 1 of the Program. Except as specified in Section 6 and 7 of the Program, a Participant shall not be required to pay any cash consideration or other tangible or definable consideration for Stock Units, nor may a Participant choose to receive Stock Units in lieu of other compensation or other compensation in lieu of Stock Units. No negotiation shall take place between the Company and any Participant as to the amount, timing, or other terms of an award of Stock Units. 8. Settlement (a) ISSUANCE AND DELIVERY OF SHARES IN SETTLEMENT. Stock Units shall be settled by issuance and delivery, as promptly as practicable on or after the third anniversary of the date of grant of such Stock Units, to the Participant or, following his death, to the Participant's designated beneficiary, of a number of shares of Common Stock equal to the number of such Stock Units; PROVIDED, HOWEVER, that the Committee may, in its discretion, accelerate the settlement date of any or all Stock Units. The Committee may, in its discretion, make delivery of shares hereunder by depositing such shares into an account maintained for the Participant (or of which the Participant is a joint owner, with the consent of the Participant) established in connection with the Company's Employee Stock Purchase Plan or another plan or arrangement providing for investment in Common Stock and under which the Participant's rights are similar in nature to those under a stock brokerage account. If the Committee determines to settle Stock -7- Units by making a deposit of shares into such an account, the Company may settle any fractional share by means of such deposit. In other circumstances or if so determined by the Committee, the Company shall instead pay cash in lieu of fractional shares, on such basis as the Committee may determine. In no event will the Company in fact issue fractional shares. Upon settlement of Stock Units, all obligations of the Company in respect of such Stock Units shall be terminated, and the shares so distributed shall no longer be subject to any restriction or other provision of the Program. (b) TAX WITHHOLDING. The Company and any subsidiary may deduct from any payment to be made to a Participant any amount that federal, state, local, or foreign tax law requires to be withheld with respect to the settlement of Stock Units. At the election of the Committee, the Company may withhold from the shares of Common Stock to be distributed in settlement of Stock Units that number of shares having a Fair Market Value, at the settlement date, equal to the amount of such withholding taxes. (c) NO ELECTIVE DEFERRAL. Participant's may not elect to further defer settlement of Stock Units or otherwise to change the applicable settlement date under the Program. 9. General Provisions (a) NO RIGHT TO CONTINUED EMPLOYMENT. Neither the Program nor any action taken hereunder, including the grant of Stock Units, will be construed as giving any employee the right to be retained in the employ of the Company or any of its subsidiaries, nor will it interfere in any way with the right of the Company or any of its subsidiaries to terminate such employee's employment at any time. (b) NO RIGHTS TO PARTICIPATE; NO STOCKHOLDER RIGHTS. No Participant or employee will have any claim to participate in the Program, and the Company will have no obligation to continue the Program. A grant of Stock Units will confer on the Participant none of the rights of a stockholder of the Company (including no rights to vote or receive dividends or distributions) until settlement by delivery of Common Stock, and then only to the extent that such Stock Unit has not otherwise been forfeited by the Participant. (c) CHANGES TO THE PROGRAM. The Committee may amend, alter, suspend, discontinue, or terminate the Program without the consent of Participants; PROVIDED, HOWEVER, that, without the consent of an affected Participant, no such action shall materially and adversely affect the rights of such Participant with respect to outstanding Stock Units, except insofar as the Committee's action results in accelerated settlement of the Stock Units. 10. EFFECTIVE DATE AND TERMINATION OF PROGRAM. The Program shall become effective as of January 1, 1998, and shall apply to compensation payable during 1998 and thereafter. Unless earlier terminated under Section 9(c), the Program shall terminate at such time after 1998 as no Stock Units previously granted under the Program remain outstanding. -8- Adopted by the Committee: February 25, 1999 EX-21 13 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF THE COMPANY ITG Inc. EX-23 14 EXHIBIT 23 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Investment Technology Group, Inc.: We consent to incorporation by reference in the registration statements (No. 33-42725 and No. 33-26309) on Form S-8 of Investment Technology Group, Inc. of our report dated January 20, 1999, relating to the consolidated statements of financial condition of Investment Technology Group, Inc. and subsidiaries as of December 31, 1998, and 1997, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1998, which report appears in the December 31, 1998, annual report on Form 10-K of Investment Technology Group, Inc. /s/ KPMG LLP New York, New York March 17, 1999 EX-27 15 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED STATEMENT OF FINANCIAL CONDITION AND THE CONSOLIDATED STATEMENT OF OPERATIONS AS OF DECEMBER 31, 1998 AND FOR THE YEAR THEN ENDED AND THE NOTES THERETO AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 77,324 24,849 0 0 40,615 19,662 180,512 0 30,105 0 0 288 0 0 0 194 143,515 180,512 0 3,635 208,570 0 0 20 51,462 80,935 80,935 0 0 43,394 2.36 2.25
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